Anyone going through a divorce or separation will know that it is a daunting prospect; it is a time of uncertainty and at the forefront of your mind will be arrangements for your children and meeting your immediate housing and income needs. The impact of your separation on your pension provision may not be an immediate concern to many, but if you get this wrong it can be a serious threat to your long term financial security.
When a couple gets divorced the starting point is the assumption that their assets should be divided between them equally, although there are factors which could justify departing from equality in favour of one party. Pensions that have been accrued during a marriage or civil partnership by either party are matrimonial assets and available for division between the spouses. Pensions accrued before marriage may still need to be taken into account if needs dictate. That said, dividing a pension will not be as straight forward as dividing other assets such as money in the bank, investments or property and a £1 of pension is not the same as a £1 of capital.
First, the pensions will need to be valued and within divorce proceedings the starting point is generally the Cash Equivalent Value (CEV), which will need to be requested from the pension company. It is important to be aware however that the CEV will not always reflect the true value of a defined benefit or final salary pension scheme. It is usually appropriate to consider instructing an actuary/pensions expert to report on how the pensions should be divided to ensure a fair outcome and/or one that will meet needs.
There are two main methods of sharing pension funds: –
Pension Sharing – The most common way to share pensions on divorce is by way of a pension sharing order. This order provides for a proportion of the party with the greater pension provision to be transferred to the other party and the share of the pension (remaining in the existing fund or invested elsewhere, depending on the scheme’s rules) will then be in their name with no further link to the paying party.
Pension Attachment/Earmarking – A pension attachment order provides for the receiving party to receive a defined percentage of the other party’s pension once it is in payment. In short, the pension payments will be divided between the parties to provide them both with an income on an ongoing basis. This holds risks for the receiving party as if the paying party dies the payments will stop and the rules of the attachment order may also state that if the receiving party remarries then the payments will end.
Sometimes the circumstances mean that it would be more beneficial to one or both parties for the party lacking in pension provision to receive a larger share of other assets in lieu of a share of pension assets. This is known as offsetting. For example, you may personally value the opportunity to stay in the family home as more important than receiving a share of your spouse’s pension. This is something that must be given very careful consideration as if you have no pension you need to know that you will be able to support yourself in retirement by relying on other assets, perhaps by downsizing and releasing the capital in the property. It is essential that you receive expert advice in this area.
On occasion a couple will separate but wish to avoid divorce proceedings, perhaps entering into a Deed of Separation to record the financial agreement between them. It is important to be aware that there can be no pension share or attachment if there are no divorce proceedings.
It is also important for cohabiting couples to be aware that should they separate they will have no right to a share of the other’s pensions, or indeed the other’s assets on separation. If you are living with a partner you may find it helpful to read our blog on living together.
Dealing with pensions on divorce is a complex area and it is important to consider taking legal and financial advice.
An excellent starting point for those wanting a better understanding of the options and what to expect are the new online resources launched by The Pension Advisory Service here: https://www.pensionsadvisoryservice.org.uk/news/tpas/divorce-and-pensions-things-to-think-about
Are you going through a divorce or separation and want to understand how it will impact your pension?
Contact Lauren to discuss your personal circumstances