Pensions can be neglected when it comes to the division of assets on divorce. The focus is often on how immediate needs will be met, which means dealing with the family home, cash and realisable investments and agreeing whether and how much maintenance should be paid.
A family lawyer will advise that ALL of the resources of each party must be taken into account and this includes factoring in the pension assets. It doesn’t always mean there will be a 50% division of the pension – it may be off-set against other assets such as the home, to achieve a fair overall outcome.
Some individuals have a tendency to guard their pensions jealously and are extremely reluctant to agree that it is shared with a former spouse. This is understandable – it may have been built up over a long period of time (perhaps starting before the relationship began) and represent many years of hard work.
Whilst it might not be accessible yet, in due course it may yield a significant tax free lump sum and a good annual income. However, in most cases the pension will be the second most valuable asset after the family home, so ignoring it altogether is bound to lead to unfairness.
There are a number of ways to deal with pensions on divorce:
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Offsetting the value against other assets (as referred to above)
- By a pension sharing order which involves the pension fund being divided and a separate fund carved out for the receiving spouse. Subject to the scheme rules, this might stay within the same pension scheme, or be transferred externally to another scheme, but the important point is that it becomes a totally separate “pot”, which is entirely the property of the receiving spouse and not affected by anything that the original owner of the pension may do in the future
- Pension attachment orders (sometimes known as earmarking orders) are relatively rare. These provide that on retirement, a proportion of the pension is paid to the receiving spouse each month. Ownership of the pension fund stays with the original owner – the receiving spouse does not have their own independent fund. It is similar to a maintenance order in that each month a sum is paid from the pension, and if the owner of the pension dies or if the receiving spouse remarries, the payments stop. Payments will not start until the owner of the pension chooses to draw it, and there cannot be a clean break between the parties.
In deciding which option is the most appropriate, it’s important to take legal and financial advice on the potential consequences. Where pensions are a significant asset within the case, family lawyers will usually recommend an expert, such as an actuary, prepares a joint report to ascertain the true value of the pension and how it should be divided to achieve a fair outcome.
The value put on a pension by the pension scheme (called the cash equivalent value – or ‘CEV’) rarely tells the whole story; simply dividing it down the middle may well produce a very unfair result. What the pension will actually produce for each party in due course depends on a myriad of factors that have to be taken into account, of which the calculations can be complicated. Final salary and public sector pension schemes are especially difficult to divide fairly without expert advice.
At Irwin Mitchell we also work with financial advisors who will look at what is best for our client as an individual, advising how to maximise the benefits that the pension can offer. This includes considering whether the pension might be transferred to a different scheme, whether it can or should be drawn as cash, or taken as an annuity and at what age.
In most cases family lawyers and financial advisors will agree that the options of offsetting pension sharing are the most suitable. Pension attachment orders can be advantageous in certain limited circumstances, but they can also be very risky. It is therefore surprising to see from the recent statistics that there was a 45% jump in pension attachment orders between 2015 and 2017 according to Family Law Court statistics for England and Wales.
It seems likely that this increase is due to more people not instructing a lawyer to handle their divorce settlement and instead negotiating a deal themselves. Although such deals might seem fair on the surface it is very unlikely people would opt for this type of order if they were aware of the risks and the alternatives. These latest statistics back up figures from research by Scottish Widows earlier this year which indicated that pensions are not being dealt with at all in many divorces which is leaving women in particular in a state of real need when they reach retirement age. Women still tend to have lower pension assets having taken a career break and/or perhaps worked part time for a period having had children.
It’s important to remember that consulting a lawyer and a financial adviser does not stop you from having direct discussions and reaching an agreement with your former partner. It simply means that you know all the potential risks and benefits beforehand, giving you the ability to check whether what seems to be a fair agreement actually achieves what you intended before you commit to it.
A good family lawyer will also know which questions to ask so you get the information you need to make wiser decisions. Sometimes valuable pension assets are overlooked – for example the additional state pension – not necessarily because an individual is dishonestly hiding assets but just because they haven’t specifically been asked about it and so did not appreciate its significance.
A DIY divorce might save you money in legal fees, but the real cost of not taking advice could be devastating.
Published: 21 November 2018
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