Pensions and Divorce
The pension scheme is usually one of the largest financial assets of a marriage, and its treatment following divorce requires very careful consideration and advice.
We Can Help You
- If you need general advice about your pension entitlement on divorce.
- If you are likely to receive a share of a pension under a pensions splitting order, we can advise on where and how to invest it.
- If you are offering or being offered other assets in lieu of pension – we can help you understand the true value of the offer and whether or not it is fair.
- If you need to know how to build your pension post-divorce.
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In the financial settlement the courts will take into account;
- personal pensions
- occupational pensions
- deferred (frozen) pensions
- pensions in payment
- the state earnings related pension (Serps) and the state second pension (S2P)
- all pension rights earned before and during the marriage (England & Wales only)
Some pensions cannot be taken into account;
- the Basic State Pension
- the State Graduated Pension
- any survivor's pension being paid following the death of a former spouse or civil partner.
There are 3 ways of dealing with pensions on divorce;
- Offsetting
- Ear-Marking
- Pension Sharing
None of these options is mandatory; each case is assessed individually and it is up to the parties and their lawyers and, if necessary, the Court to decide on the best method for taking pension rights into account in the divorce or dissolution settlement. A combination of methods can be used, but the same pension rights cannot be both shared and earmarked.
Pension Offsetting
Offsetting means that the value of a spouse's pension is traded against other assets from the marriage. For example, one spouse keeps their pension or a majority of it. To offset the value of the pension asset the other spouse receives a bigger share of the matrimonial home or other assets such as cash or investments
Disadvantages
- Offsetting is difficult where the pension is the largest asset and there aren't enough other matrimonial assets to trade against it.
- Trading off pension values against other assets can be complicated. For example, it would be unfair for a 40 year old spouse with a pension fund worth £100,000 to be asked to give up £100,000 worth of other assets such as cash or property. Complex calculations and the circumstances of both parties need to be considered.
Advantages
- Offsetting provides a flexible way of splitting assets.
- It provides a “clean break”.
Ear-marking
This was introduced by the 1995 Pensions Act. It allows for part of a pension, including any lump sum benefits to be paid to the ex-spouse when the pension is eventually drawn.
Disadvantages
- No "clean break" - the ex-spouse receives benefits only when the pension-holder takes benefits.
- An ear-marking order is capable of being varied leaving the pension-holder vulnerable to further claims by the ex-spouse.
- The ex-spouse has no control over where the funds are invested.
- The ex-spouse can lose all benefit if he or she remarries, or if the pension-holder dies before retirement.
Although ear-marking is not satisfactory, the courts can still make an ear-marking order if they think it appropriate or if it is what the parties agree.
Pension Sharing
Pension Sharing is sometimes known as Pension Splitting. Introduced by the 1999 Welfare and Reform Act, it gave the Courts the power to split pension rights between spouses on divorce.
The pension is given a cash value and split as a percentage. The percentage is either agreed by both parties, or ordered by the Court on the basis of the circumstances of each spouse. This value is transferred, by way of a court order, to the ex-spouse as a separate, independent, pension while the pension-holder has a reduced pension value.
The ex-spouses separate pension can stay within the scheme if the trustees are willing to allow this – this is called internal sharing. In reality, most pension scheme trustees insist on the value being transferred out to the ex-spouse’s own pension – this is called external sharing.
Advantages
- It is a "clean break".
- The ex-spouse has a separate pension fund that he or she can control both in terms of investment choice and when to take the benefits.
- The pension-holder will be able to keep more of the other matrimonial assets.
Disadvantage
- Pension sharing is only available to married couples or those in a civil partnership, and is not available to cohabiting couples.
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Top Tips
- State pensions - although you cannot take the basic state scheme into account, if you do not qualify for a full basic state pension, you can substitute your NI record for that of your ex-spouse to increase your pension as long as you have not remarried.
- State pensions - ensure you take into account Serps and S2P benefits as these can be shared.
- Take care to understand the true value of all pensions especially final salary schemes – and particularly some public service schemes where there is early retirement; police, fire service, and army. This might mean getting an independent valuation.
- You need to take advice where you are being offered a share of an under-funded scheme.
- Take advice where you are being offered the option for internal sharing of a pension.
- Take advice early.
Need Help With Other Divorce or Separation Issues?
Kirsten Gronning is a Divorce Coach offering practical support and emotional understanding which enables clients to collect up all the threads if their marriage is breaking down, tie them altogether and move on with support from people who know what to do and how to go about it. By using her services, people find answers faster and more cost effectively at a time when their lives are often falling apart.
Put simply, for those facing or going through a divorce or ending another long-term relationship, it's a cost and time efficient way of finding the balance between the divorce process and getting on with the rest of their lives.
For all sorts of useful information and tips, and to find out how she might be able to help you, visit her website www.divorcecoaching.co.uk. By clicking on this link, you will leave the Pension Improvement Strategies website and view the content of an external website. Pension Improvement Strategies cannot be held responsible for the content of external websites.