Account
Browse

A Guide to the Treatment of Pensions in Divorce

A Guide to the Treatment of Pensions in Divorce

A Guide to the Treatment of Pensions in Divorce

Posted: 14/06/2022

When a couple get married, all of their respective financial resources fall into the “matrimonial pot” of assets and become available for distribution in the event of a divorce.

There are three categories of asset to consider post-separation – namely capital, pensions and income.

Many separating spouses are surprised that their pensions are taken into account in a financial settlement; whilst almost all divorcing couples are aware of the fact that their matrimonial home (and any additional capital assets) will need to be divided in the event of a separation, many people consider their pension assets to be their exclusively their own. The legal position however is that the division of pension assets is often a fundamental element of a financial settlement following a divorce. The court will essentially look to address any significant imbalance in spouses' pension positions.

What are my legal rights to my ex-spouses’ pension in divorce?

The starting is that pension assets should be shared equally. However, pensions are complicated assets; very often the Cash Equivalent Transfer Value (“CETV”) that is stated on a person’s annual pension statement is misleading in terms of the annual income that the pension will produce in retirement. Achieving equality in respect of pensions is therefore not as simple as adding up the parties’ respective pension CETVs and dividing the total figure in half.

When the court looks at achieving equality in respect of pensions, it is generally looking at re-distributing the parties’ pension assets to ensure that they both have the same pension income in retirement.

It can be costly to implement pension sharing orders and so often the court will suggest that parties’ each retain their own pension assets, assuming they are roughly comparable in value. However, any significant disparity must be addressed.

What factors can affect my share of the pension benefits?

The court takes into account a number of factors when determining how to divide assets following a separation. These factors are set out at Section 25 of the Matrimonial Causes Act 1973.

The court will generally not be influenced by poor marital behaviour, such as infidelity or substance misuse. The court takes a “facts and figures” approach, looking predominantly at the likes of the parties’ resources, the length of the marriage and the parties’ respective needs (“needs” being a subjective concept which is interpreted generously in accordance with the marital standard of living).

The court will consider both parties to have made an equal contribution to the marriage, irrespective of their actual practical or financial contributions to day-to-day married life. For example, the spouse who is the “breadwinner” will not be deemed to have played a more important role in the relationship.

Until fairly recently it was often the case that spouses could successfully ring-fence any pension assets accrued prior to the marriage. However, the court prioritises meeting needs over protecting pre-marital assets and therefore the more common approach now is to focus on achieving equality in respect of pension assets as a whole, regardless of when they were accrued. 

How does the court deal with pensions in divorce?

There are a number of ways in which pensions can be dealt with in a financial settlement – including by way of a pension sharing order, a pension ear-marking order or an off-setting order. These various approaches are dealt with below.

What is pension earmarking?

Historically, the court would divide pension assets by implementing what is known as a “pension attachment order”, or “ear-marking order”. Such orders made in respect of a relevant pension will provide that, when the pension is drawn, all or part of the tax-free cash benefit and / or pension income will be provided to the scheme member’s former spouse.

There were some fairly significant drawbacks to pension attachment orders. Firstly, they required former spouses to remain financially tied to one another, forcing them to maintain contact for potentially several years post-divorce. In addition, the spouse on the receiving end of the pension attachment order would be limited by the fact that they could only begin to receive their pension when it is drawn by their former spouse – they would have no control themselves in terms of the date of their retirement. It is for these reasons that pension sharing orders were introduced in 2000.

What is pension sharing?

A pension sharing order involves a percentage of one party’s pension being transferred out of their existing pension scheme into a separate scheme in the other party’s name.

Whilst the court does still have the power to make pension attachment orders, naturally pension sharing orders are the preferred approach to dealing with pension disparities – the reason being that pension sharing orders allow pension assets to be carved up at the time of divorce, thereafter allowing both parties to go their own separate ways, both in control of their own pensions and free from any ongoing financial ties to the other.

What is pension offsetting?

It is also possible for one party to “buy-off” the other party's pension claims – essentially providing the other spouse with additional capital in order to forego their pension sharing order. This approach is known as “offsetting”.

As an example, one spouse may have a pension worth £500,000; we can assume for illustrative purposes that the other spouse would be entitled to receive £250,000 from that pension scheme (albeit as above, the level of pension share required to achieve equality is seldom as simple as dividing the capital value in half). The spouse in possession of the pension may offer to provide their ex-partner with capital in lieu of a pension sharing order.

It is accepted by the court that cash paid upfront is more valuable than cash preserved in a pension which may not be accessed for several  years, and so pension off-setting is not conducted on a pound for pound basis. In the above scenario for example it may be that the capital lump sum required to achieve an off-set amounts to say £180,000 - £220,000.

How can I protect my pension when I divorce?

The concept of dividing pension assets is a bitter pill to swallow for many and raises the question as to how pension assets can be protected in relationships. The best advice for any individual who has a significant pension and is concerned about potential pension sharing is simply not to get married in the first place; however, if that individual does want to proceed with a marriage then it would be strongly advisable to enter into a Pre-Nuptial Agreement well in advance of the wedding ceremony.

How can I get an accurate pension valuation for use within divorce proceedings?

In terms of negotiating the division of pension assets, the starting point for both spouses is to exchange up to date financial disclosure. Both parties should obtain a Cash Equivalent Transfer Value (CETV) in respect of any and all pension schemes held in their names.