A guide to understanding the basics of pension sharing by Vanessa Lloyd Platt, Lloyd Platt & Co
Divorce or separation can be a challenging and emotionally charged time in one’s life. Beyond the emotional aspect of a relationship breakdown, there is also the complex matter of pension sharing, whether you were in a civil partnership or a marriage.
To navigate pension sharing in a divorce or separation successfully, it’s crucial to understand the legal and financial aspects involved. In this guide, we’ll explore key concepts and considerations to help you achieve a fair divorce settlement including division of pension funds.
What happens with finances in divorce?
When trying to reach a financial settlement, parties may have several claims against each other. Some claims are not appropriate in every case, and claims need to be understood carefully for parties to understand the correct options moving forward and to avoid unequal division. They can include orders for:
- property adjustment orders i.e., how the house or properties should be divided
- lump sum orders i.e., to divide up bank accounts or other capital
- maintenance orders and/or spousal maintenance if appropriate, one party to pay maintenance to the other for a specified period
- child support, this is a form of maintenance paid to the party on behalf of the children of the family for a specified period and is a certain set amount which is calculated in accordance with Child Support rules
- finally, there are claims against the other for pension rights.
What is Pension Sharing?
The concept of pension sharing was introduced by new legislation in December 2000 and have given three options for divorcing couples:
- Pension sharing is a formal agreement to divide up pension assets at the time that the divorce takes place. With pension sharing the Courts, together with the parties and pension advisors, calculate the exact percentages of the party receiving the pension. They will obtain and check that they can become a member of the pension scheme or transfer the correct value of percentage to a new pension provider of their choice.
- Pension offsetting is where the value of the pension can be assessed by a pension advisor and be set off against other available assets and possessions in the matrimonial pot. A typical example is where one party retains the majority of the family home the other would instead keep the entirety of their pension pot. It is incredibly important that a Pensions Actuary is instructed to ascertain the correct pension percentage.
- Earmarking is where all or part of the pension can be earmarked to pay to the receiving party when the other party starts to draw down their pension benefit. This means that the party that owns the pension accepts the other party will draw down the benefit.
In the majority of matrimonial cases, where appropriate, the most common aspect dealing with the pension is for there to be a pension sharing order.
Obtaining a Pension Sharing Order
The pension sharing order will set out the percentage of the pension that will be given either to you or to your ex-partner. For the pension sharing order to be effective the Court must make the order for the pension sharing.
This must be distinguished from other assets in a divorce i.e., shares, bank accounts or the home that can be transferred between the parties without Court interference though it should be recorded in a consent order.
It is important to note that pension schemes or pension providers cannot change the terms of a pension by dividing it or transferring it without the sanction of the Court. This does not mean that the parties have to attend Court in person as the documentation can be drawn up through their legal advisors or a pension advisor, but it must be sanctioned by the Court itself.
It is important further to understand that once all of the marital assets have been considered, a percentage of the other party’s pension will have to be established. This is commonly referred to as a pension credit. The amount that is to be deducted from the other party is called a pension debt.
Once there is an agreement as to the percentage, which should be carefully calculated, a consent order will be drawn up, dealing with the other matrimonial assets and a pension sharing annex will set out clearly the proportion that will be transferred.
Because interest is constantly being recalculated on pensions the exact amount of the pension credit can only be established once the Court order is finalised. That amount would be the percentage of the transfer value known as a cash equivalent transfer value.
Because of moves in the stock market the CETV value can keep changing and therefore it is important that your lawyer negotiates this considering the most up to date valuations. Pensions are not always shared exactly equally. What is considered by Pension Actuaries when calculating this, is to work out if there should be if possible equal incomes in retirement taking into account other money and assets.
The value of your own pension will always be considered to ensure that there is a fair split. The ages of the parties and their health can also be a factor taken into account as life expectancy can impact on this.
Strategies for Receiving Your Share of the Pension
Generally, there are two methodologies by which the pension share can be received by the spouse who does not have the greater pension: a) they can become a member of their ex-spouses’ scheme which is known as an internal transfer; or b) they can transfer the value to another pension arrangement in their own name known as an external transfer. Once the pension sharing order comes into effect the receiving party will own the pension in their own right.
Many clients ask the question, is it a good move for me to take a share of the pension as opposed to other personal and business assets, money and belongings. The general advice that would be given is that the pension share might be the best option in dividing up the assets in divorce if:
- your partner has high value pensions compared to the other assets
- you are considering you might remarry quickly as the pension sharing order cannot be changed at a later date
- you are an older couple and accordingly can take benefits from the pension credit at the age of 50 rather than waiting until your ex-spouse retires
- you are close to retiring yourself and will find it impossible to build up similar pension benefits in a short period
- you would prefer to be able to nominate potential beneficiaries of any death benefits if you were to die before taking your retirement benefits.
Exploring the Flexibility of Pension Sharing Orders
Pension sharing orders do give flexibility and choice. Generally speaking, many spouses do tend to prefer to keep the family home or the majority of the proceeds rather than pension sharing.
This is generally because they do not understand that sometimes there are huge benefits of a pension share and that by failing to consider the pension and its value they will be losing out on assets for the future.
It is also vital that you and your lawyers understand that not all pension schemes are capable of being shared. For example, the following cannot be shared, namely:
- schemes in which the only benefits are equivalent pension benefits
- basic state pension
- new state pension
- pensions where the member is receiving as a spouse, civil partner or dependent
- pensions already subject to what is known as an earmarking or sharing order
The ones that certainly can be shared are:
- occupational pension schemes including AVCs
- personal pension schemes
- stakeholder pension schemes
- section 32 policies
- retirement annuity contracts
- statutory pension schemes
- freestanding AVCs
- employer financed retirement benefit scheme – unapproved schemes
- contracted out benefits state second pension S2P and state earnings related pensions SERPS
- pensions in payment from any of the above
One of the greatest aspects of negligence cases in divorces has been found to be in the area of pensions. There are several areas where mistakes can be made, namely the timing of the pension sharing order or failure to place the document into Court quickly enough or chase the orders or failing to calculate the wrong aspect of pension sharing or the value of the pension itself.
Deciding whether to take a share of the pension in divorce requires careful evaluation of your unique circumstances and priorities. Your choice should align with your long-term financial goals and provide you with a secure financial footing as you embark on the next chapter of your life.
Often not enough is understood about the pension and a Pension Actuary not consulted which results in the wrong valuation being calculated and with it the wrong percentage for sharing. Seek advice from experienced divorce professionals and financial experts to determine the most suitable approach for your situation.
At Lloyd Platt & Company we ensure that we work with the best Pension Actuaries to ensure that calculations are at the most advantageous and that great consideration is given to whether a pension sharing order is appropriate, helpful and in the client’s best interests. Understanding these options is essential for divorcing couples to navigate the complexities of pension division effectively.
If you want to the discuss any aspect of divorce and separation, including Pension Sharing, please fill in our form, call us on 0208 343 2998 or click to contact our specialist family lawyers in London.