Pensions and the role they play in Divorce.

When couples separate and divorce, part of that process will involve dividing the assets from the marriage and making two households out of one. 

Dividing up cash, savings and the family home are relatively straightforward. In contrast, pensions are a more complicated asset to distribute, and are often overlooked.

Pensions can be shared just like any other marital asset. Since its introduction in 2000, this has become one of the most common ways in which pensions are dealt with today as part of any divorce settlement. However, the share of the pension cannot usually be made available immediately but will provide some pension benefit in the future. In addition, there are a variety of types of pension schemes with differing approaches to calculating the eventual pension payments. 

One key difference between the way pensions are dealt with, depends on whether a scheme is based upon defined contributions (for example, a private pension into which a set amount is paid into per month), or a defined benefit scheme (for example, a final salary pension scheme), which is calculated by a formula based on the earnings history, years of service and age, rather than depending directly on individual investment returns.

Alternatively, experienced investors or company directors may have a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS) which might include a portfolio of assets such as commercial property, woodland, shares and business investments. 

It is perfectly possible for a couple to have pension funds of the same size but differing predicted monthly payments, even if they both work in the public sector.

Feeling slightly worried or anxious about the complexities that come with a pension? The legal Jargon and understanding what your rights and entitlement to your other half’s pension are? Please carry on reading so I can ‘put a lid on’ some of those worries.

Offsetting

In some cases, it might be preferable to keep the pension intact and provide one party with a larger share of the capital.

For example, when one person earns little they might struggle to raise a mortgage to buy a house. If the higher earner has a large pension pot, they might prefer to keep the whole of the pension and (subject to appropriate valuations) give their spouse more capital in exchange. This is known as offsetting; however, pensions and capital cannot be compared on a pound-for-pound basis.

Valuing the pension

The starting point is to contact your pension provider to request an up-to-date valuation of your pension or pensions – one is required for each pension you have. This is straightforward and a telephone call to your pension provider is usually sufficient. You will then receive a written valuation (or Cash Equivalent Value - CEV) in respect of the pension, which says what the pension fund is currently worth and your expected pension payments.

For most private pensions, that valuation will usually be sufficient to provide accurate information to allow you to determine long-term arrangements. However, the picture is far from straightforward for SIPPs, SSASs and defined benefit public sector or armed forces pension schemes and so may require some additional work.

In these cases, the CEV may not be a true valuation of the pension fund. This is not because of anything untoward, it is simply to do with how the calculations are done, as the CEV provided may be lower than the actual value of the pension.

This can arise for a number of reasons, as demonstrated in the following scenarios:

·        If the defined benefit is calculated based upon length of service of the serving spouse, the difference can be significant. For example, where the wife is a serving police officer who has 24 years and 364 days service, her pension provider says she has a CEV of ￡250,000. However, 24 hours later, when she has attained 25 years’ service, that pension may be worth ￡350,000.

·        Where the pension fund includes property investments, values may change significantly particularly if planning permission for development is obtained. An acre of agricultural land may be worth ￡20,000 today, but with planning permission for a solar farm or a business park, its value could increase

tenfold.

The benefit of an actuarial valuation

If the value of your pension or your partner’s pension is substantial, you may want to consider instructing a pension expert.

A pensions expert, often referred to as an actuary will be able to provide an accurate valuation of the pension fund and expected payments. The expert will even be able to advise you as to how the pension should be dealt with as part of any final settlement, given that it is another asset. Unfortunately, an actuary’s report can be expensive, which is why couples tend not to instruct such experts and instead focus on the ‘liquid’ assets. Remember, the pension itself will form part of any final settlement and may affect the terms of the agreement reached due to the number of different ways in which it can be dealt with. You may therefore want to consult with an expert or financial advisor before reaching a financial agreement.

Can I claim against a pension that is already in payment?

The short answer is - Yes! Just because your spouse is already receiving their pension, does not mean that the pension fund cannot be shared. However, it may be necessary to obtain an actuarial report to assist with calculating the appropriate percentage split. Again, another reason why you may want to think about instructing an expert.

What about state pensions?

It is possible in certain circumstances to have a pension sharing order against your spouse’s state pension – this might be particularly relevant if one party has not worked sufficiently to build up their NI contributions and so is not eligible for the full amount of the state pension.

Is a Court order required?

In the United Kingdom, a pension provider will not be able to implement the terms of the agreement reached in respect of the pension, without a sealed Court order. This is prepared by Solicitors and will be your ‘winning ticket’ to your partner’s pension.  

As can be seen, pension calculations are complex, but your financial security on retirement, may be at stake if proper advice is not sought at the unfortunate time of a divorce or separation. It is vitally important to seek legal advice from a solicitor who will be able to explain to you in more detail about how to share any pensions and how to obtain accurate valuations.

For further information, please contact Farah Naz of the Family Law team on 01702 443 480 or email [email protected].