Pension sharing and divorce – what and how does this work?
When you divorce or dissolve a civil partnership, you automatically have financial claims against your former spouse or civil partner. This includes potential capital claims for lump sum(s), property adjustment orders pension sharing and income claims by way of maintenance.
When an agreement is reached as to how the financial matters should be resolved this is embodied into a court order, which makes it a binding agreement. If by consent, neither party attends court, this is dealt with as a paperwork exercise. If the parties cannot agree, the court’s assistance can be sought and a Judge will make an order. A court order, also known as a final order, may therefore include a pension sharing order.
A full and frank disclosure is provided in relation to all of the assets available to the parties so it can be assessed and negotiated as to how they should be divided. ‘Financial disclosure’ is the term used to describe the documents you provide about your income, assets and liabilities.
Pensions can be valuable assets, but are often either ignored or given insufficient weight during such negotiations. This blog piece explores in more detail the concept of pension sharing upon divorce.
It is essential to note that pension sharing is not available to couples that are unmarried or not in a civil partnership.
The figure that we look at when valuing pensions in divorce proceedings are ‘cash equivalent values’ (known as CE’s). This can be different to the fund value and it is therefore important to ensure that the CE’s are obtained. There are many different types of pensions which all have different benefits. This means that even when you have the CE’s of all of the pensions both parties own, you are rarely comparing the same type of pensions and this can often be described as comparing ‘apples with pears’.
There are three main options to split a pension:
Pension sharing is whereby a percentage of a pension fund is extracted from a pension and placed into the other person’s pension pot. The person transferring the funds from the pension pot is called the transferor and the person receiving the funds is called the transferee.
Depending on the pension scheme’s policies, it may be possible for there to be an internal or external transfer.
An internal transfer is whereby the transferee can maintain their share of the pension in the same scheme, albeit in their sole name.
An external transfer is whereby the transferee can select which pension pot they want their percentage share to be invested in.
There is usually a fee for implementing the pension sharing order.
A pension sharing order is required to take place within a set period of time from date of the final order. You also have to have secured the final order/decree absolute in the divorce/dissolution prior to it being implemented.
Any contributions made by the transferor into their pension pot after the pension sharing order has been implemented will benefit the transferor only, and their pension pot will continue to accrue.
The benefit of a pension sharing order is that after implementation, the death of either party will not impact the other persons pensions. This is because both parties hold their pensions in their individual names and have control over their own pensions. They can choose when to draw down their pensions or take lump sums.
There are different ways of calculating a pension share, which is set out in more detail below.
A pensions attachment order is where the person receiving the pension has to give part of their pension to their former partner.
This is a less common arrangement as the person with the benefit of the attachment order is reliant on the ‘owner’ of the pension drawing down their pension.
The pension dies with the owner of the pension, which means that after death the attachment order would come to an end.
Pension offsetting is very common. Pensions may be offset for other capital assets. For example, one party may wish to retain a larger share or all of their pensions, on the basis that the other party receive a larger share of the family home for example.
The Pensions Advisory Group (PAG) issued detailed guidance in 2019 as to the treatment of pensions on divorce and the issues that can arise with offsetting, for example:
Following the case of McCloud, there are strong arguments against offsetting in respect of public sector pensions. In 2015, the Government introduced reforms to public service pensions. In 2018, the Court of Appeal found in the case of McCloud that the rules put in place in 2015 to protect older workers were discriminatory. The Government are taking steps to remedy this discrimination, but this is likely to take a number of years to implement. The ‘remedy period’ is 1 April 2015 to 31 March 2022.
As a result of this, if you were to agree an offset in respect of pensions accrued during this period, there is a risk that the pension would be undervalued until the discriminatory period has been remedied.
If a pension is shared and under the Government scheme there is an uplift in the pension at a later date, both parties will benefit from the uplift. However, if only one party is retaining the pension they will solely benefit from the uplift, which may be unfair.
There are two other methods of sharing a pension which are less common in divorce proceedings as they are more risky:
This is similar to a pension attachment order and enables you to receive a lump sum when your former partner retires.
Where there is an age gap between a separating couple, it may be agreed that there be a deferred pension sharing order which allows the younger party to delay taking their entitlement until they reach pension age.
There are risks with both of these options as the death of the ‘owner’ of the pension would prevent the other from receiving their agreed lump sum/share. Alternative provisions may therefore have to be put in place should this occur.
If a pension sharing order is agreed or made by the court, there are two different ways to share pensions.
The first method is by splitting the fund values, so that both parties have equal CE’s. However, splitting pensions so that there are equal CE’s does not necessarily mean that both parties will receive the equal income.
The second method is to split the CE’s based upon producing equality of income, so that upon retirement both parties would receive the same income from the pension pots. If there were a long marriage, for example, this method may be considered fairest.
To calculate the pension share required to achieve equality of income into retirement, a pension actuary would need to be instructed to advise on the appropriate division. This is normally undertaken as a joint report with the fees being shared, however, financial resources may impact on how this is paid for.
As there are usually fees associated with pension sharing, if there are a number of pensions, it may be cheaper to combine a pension share so that this comes from fewer pension pots. Again, advice would be needed from an actuary to assess how to achieve this fairly.
The starting point is for pensions to be shared equally. However, all the circumstances of the case are taken into account. Sometimes, there can be ringfencing for pensions that have been accrued prior to the marriage/civil partnership or post-separation.
Pensions are often one of the most significant assets a couple has and so taking advice from a specialist divorce solicitor with expertise in pensions is vital to protect your financial future.
If you would like further information about pension sharing, or any other aspect of divorce and finance, then please do not hesitate to contact a member of the team for confidential advice about your specific circumstances.
Zoë Summers is a Specialist Family Solicitor and Collaborative Lawyer in Eastbourne.