Divorce is a stressful time for anybody, with emotional and financial stresses taking their toll. ‘Who gets what’ inevitably makes matters more complicated. When looking at a financial settlement, all assets must be taken into account.
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How are pensions dealt with in a divorce?
The starting point of a divorce is the sharing of matrimonial assets, which, as of December 2000, includes pensions. It is important to have a clear view on what resources there are before negotiating a settlement. Pensions can often be overlooked especially if you are not close to retirement. However, it is increasingly clear that pensions can be one of the largest assets available to you on divorce. It is tempting in some cases to focus on assets such as property or cash, but pensions should not be discounted readily without due consideration and advice. Whether you are close to retirement or not, pensions should certainly be considered in any financial settlement and it is important when looking at your future financial security.
What difference does the type of scheme make?
The first step is to ensure you have the relevant information in respect of each and every pension asset you and your spouse have. You need to obtain a Cash Equivalent Transfer Value (CETV) for each pension, or Cash Equivalent Benefit (CEB) statement if the pension is in payment. The CETV tells you what the pension is worth at that particular point in time. However, some pensions, such as a defined benefit pension and publicly funded pensions (such as the Armed Forces, NHS pensions) can be far more valuable than their CETV suggests. Such schemes cannot be replicated on the open market for the same price and therefore the value and nuances of the scheme need to be looked at in more detail.
Due to the complexities of different schemes, it may be necessary to instruct a pensions on divorce expert (PODE) to produce a report, providing various calculations which can then assist in reaching an overall agreement with reference to the particular pension assets available and having regard to the particular terms of the schemes. It is usual for a PODE to be asked what percentage of the pension is required by one spouse in order to equalise income on retirement.
Advice on the differences of these schemes and what that means for you is very important; failure to take good advice on these pensions may result in undesired results when pensions are taken, and one party receives far less than expected.
What are the options for splitting a pension?
There are three main options for dividing pensions as part of a divorce:
Sharing: This is a formal agreement to divide your pension at the time of divorce. A percentage is attributed to the receiving party (i.e. not the scheme member) who may opt to have the pension credit put into a separate fund with the same pension scheme (if available) or transfer the value to a new pension provider.
Offsetting: The value of the asset is offset against other assets. For example, one spouse keeps their entire pension and the other retains alternative assets such as property or cash. Care needs to be taken as to the amount ‘offset’ as they are not like-for-like assets.
Earmarking: Where all or part of the pension is earmarked to be paid to one party when the other starts to draw benefits. The pension remains in the other spouse’s name. This is not often used now, but remains an option nonetheless.
If an agreement regarding the pension assets is reached, it must be recorded and approved within a Financial Order as part of divorce proceedings for it to be implemented.
What happens to the State pension?
You are now unable to share your spouse’s national insurance contributions to ensure you have the full ‘qualifying years’ entitlement to the full State Pension. Due consideration regarding the impact of this on one spouse over another is also something that needs to be factored in.
How can Goughs help?
At Goughs we have a wealth of experience in advising and supporting clients in considering their financial circumstances and ensuring that consideration is given to all aspects of a financial agreement. We offer an initial appointment to discuss the specifics of your matter with you to ensure you have the right information to help you make an informed decision.
