Pensions & Divorce

With pensions being most people’s second-largest asset, they can become a major consideration in any divorce settlement.

Offsetting

Pension funds are valued and the spouse with greater benefits provides the other spouse with additional funds elsewhere in the settlement, to compensate them for the loss in pension rights.  Unfortunately, many people do not have sufficient assets to enable offsetting.

Earmarking

Applies to all private pensions (including those in payment), but not state benefits. It involves the court issuing an attachment order to the pension scheme. This attachment requires the scheme’s trustees to pay a proportion of the member’s benefits directly to the ex-spouse, when the benefits are taken. The court can also earmark a proportion of the member’s ‘death in service’ lump sum, and widow(er)’s pension benefits, for the protection of their ex-spouse.

Pension Sharing

Pension sharing applies to all pensions, apart from the state basic old age pension. All pension benefits are valued. The share can be granted by way of a transfer to the petitioner’s own scheme, or the petitioner may become a ‘paid up’ member of the respondent’s company pension scheme. This latter option is rarely used, as the retaining scheme will not wish to have the increased costs, disclosure requirements and administrative inconvenience associated with additional members (non-employees).

The rules allow schemes to insist on ‘buying out’ the spouse’s benefits, if the scheme considers it appropriate. Most schemes insist on this route. The exception is usually the government and Local Authority schemes, which are ‘pay as you go’ and therefore reluctant to pay large transfer values.

Pensions that are already in payment (eg. through an annuity) can be ‘unbought’, split and ‘rebought’ using the annuity rates for the member and petitioner at date of divorce. Indeed, if the petitioner is much younger, they can use the lump sum as a pension contribution (or many other alternatives).

The biggest problem with pension sharing is the cost. Schemes are entitled to charge for the calculations and administration involved in splitting the benefits.

Summary

We expect pension sharing to be used in the vast majority of divorce cases, where offsetting is not an option. Cost will, however, be a key issue. Any transfers will have to be sufficient to warrant the large costs involved in calculating and organising the new arrangements.

A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.