Pensions in Divorce Settlements
Pension In Divorce is a complex matter, especially as there’s a lot to think about during divorce or dissolution of a civil partnership. Going through the financial settlement can be an especially upsetting and confusing time and pensions are often overlooked because the benefits are not immediate. However, it’s important to decide how you want to deal with your pension as it may be one of your most valuable assets after the family home.
How our Solicitors can help you Divide Pensions in the Financial Settlement
At Rowlinsons, our expert family law solicitors have many years of experience supporting divorcing couples throughout the North-west and Cheshire. We’ll guide you through your options so you can choose the best way to sort out your pension arrangements.
Not only are we qualified to consult on divorce and the related financial matters of separation, but we also have specialist training and accreditations in non-court alternative resolution, such as family mediation and collaborative law processes. We’ll take you through the benefits of each option and explain the process involved so you can choose the service that’s right for you.
Get the professionals you can trust. Recognition of our expertise in Family Law is shown by our membership in the Law Society's Family Law accreditation scheme. We are also part of the Resolution, which highlights our commitment to resolving disputes amicably, and the Resolution Accreditation scheme which evidences our skills and expertise in complex family law cases.
Get in touch today to find out how we can help you navigate Pension aspects of a financial settlement in divorce.
Dealing with Pensions in Divorce or Dissolution
Pensions are included as part of the financial settlement in the termination of a marriage or civil partnership and the court will consider both spouses’ pensions. In England and Wales, the total value of the pensions will be taken into account. This can include funds that were accrued before you were married and after the separation.
The court has the authority to offset the value of your pension against other assets or to order the sharing of a pension between spouses. In some situations, pension attachment orders are made, although these are rarer these days.
Understanding Your Pension Options During Divorce
The main ways of dealing with pensions are as follows:
The value of the pension is offset by the value of other assets. This might mean that if you want to keep the family home you can, but it’ll be at the expense of receiving your ex-spouse’s pension benefits. That’s why it’s essential to get an accurate valuation of all assets included in the settlement.
It's also important to think about the future, and how you will support yourself financially if you don’t take a share of a pension asset. Pension offsetting allows for a clean break once the financial consent order is finalised. This means your ex-spouse can no longer make a claim on your pension value or payments.
It may be that you don’t have enough assets to offset the pension's value. In this case, you may instead opt for a pension sharing arrangement.
Pension sharing on divorce, the newer procedure of the three, is when one spouse receives a portion of the other’s pension benefit. The pension pot is split so that one person receives the pension credit, debited from the other’s funds. The person receiving the credit can in some cases transfer the amount to a different pension scheme (external transfer), but this depends on the pension scheme and the shared amount may simply be transferred to a separate pot within the same scheme (internal transfer). Not all pension schemes are equal.
Whether it’s an internal or external transfer, it may make a difference to the income you receive in retirement. Therefore, it is often prudent to take independent financial advice as well.
Pension sharing allows for a clean financial break. Once the pot is shared, each person is responsible for their own portion and will know at the time of divorce how much that is. Re-marriage or death won’t affect either party’s pension benefits.
Also known as ‘earmarking.’ In this option, a portion or all of the member’s pension is diverted to the ex-spouse or civil partner when the pension is due to be paid. The ex-partner in receipt of the benefit is subject to conditions such as losing their entitlement to the payment if they remarry, or their ex-spouse dies.
Earmarking does not give the receiving partner any control over how the pension is managed and they will be taxed at the rate of the person who owns the pension which means they could be paying more than their tax rate. It is also at risk if the ex-spouse is declared bankrupt in the future. Because of these limitations and the fact that they do not allow for a clean break financially, pension attachment orders are relatively rare.
How do I sort out my Pension During a Divorce?
Your situation is unique and while there are many complexities in dealing with pensions during a divorce there are steps you can take to ensure that you deal with your pension most effectively.
- List all your pensions - During the financial settlement, you must identify all your assets. This includes any pension schemes you’ve paid into over the years. Pensions include personal pension schemes, self-invested pension plans (SIPP), work pensions (final salary or defined contribution or former employment pension schemes), small self-administered schemes (SSAS) and additional state pensions.
- Get an accurate valuation – Most pension administrators will issue an annual statement where you can check the cash equivalent transfer value (CETV). Bear in mind this is not always an accurate figure of what you could receive so it’s best to get financial and legal advice first. You may need to talk to a pension expert or get an actuarial report to uncover its true value.
- Explore options – In England and Wales, the three basic ways of dealing with pensions in a divorce are pension sharing, offsetting its value against other assets, and earmarking a portion of the pension benefit for the receiving spouse. The best option depends on your circumstances, for example, couples with other assets valued less than the pension would perhaps opt for pension sharing. Your family law solicitor can talk you through all your options and help choose the right one for you.
- Get a financial order – Whatever you decide there needs to be a court order to finalise proceedings and make the agreement legally binding. For example, the pension administrator cannot implement pension sharing without a pension sharing order. We can help you with drafting the paperwork for the proceedings.
How relevant are pensions in divorce?
You might think your pension won’t be included if the marriage lasted a short time, your pension started before you got married, or it’s tied up in a family business. In these circumstances, the court will still include the pension in the financial settlement in England and Wales.
What if my pension is tied to the family business?
If you or your spouse have a small, self-administered scheme (SSAS) where the pension is part of the family business, the assets in the pension fund will be valued as a whole to identify the value of the specific portion you hold as a member. It may seem quite complex, but when you break it down the percentage you hold in the family business pension scheme will be treated like any other pension and pension sharing or offsetting options can be explored. It is vital to seek advice from both legal professionals and financial advisers.
What if I’m already receiving my pension?
For older divorcing couples, one partner may already be past retirement age, and drawing their pension income. You can still make a sharing order, however the one receiving it might have to wait until they reach a specific age.
If the retired spouse is receiving the old basic State Pension or new State Pension, the other spouse may be entitled to a tax-free lump sum of any of the retired spouse’s private pension funds.
What if the divorcing spouse’s pension is overseas?
International divorces can be more complex because of the conflict of different legal jurisdictions. Enforcing a pension sharing order, or any other pension arrangement following a divorce or dissolution, requires a high level of legal expertise in the field.
A pension attachment order is generally considered by the court, as it is up to the overseas pension provider to implement a sharing order. However, the English courts have limited power over foreign jurisdiction, and may prefer directing the pension holder to transfer the pension to an English one. In cases where this is not an option, they will likely implement a pension offsetting arrangement against the value.