On divorce, there is frequently a disparity between the husband and the wife’s pension provision. Commonly, the husband’s pension is much larger because he has been the breadwinner whilst the wife has remained at home bringing up the family.
References below to husband and wife can be interchanged with civil partners.
In the past, the only way to compensate a spouse for this disparity was by offsetting i.e. awarding one spouse other liquid assets to compensate for the loss of a pension.
Since 1st December 2000, however, the divorce courts have had the power to make orders dividing pensions between spouses. These are called pension sharing orders. A pension can only be divided by order of the court, not by private agreement.
A pension sharing order provides for a specified percentage of the cash equivalent transfer value of the pension to be transferred to the other spouse. The cash equivalent transfer value or CETV is the figure which the pension provider could transfer to another pension fund (if the fund was being transferred between providers).
CETVs do not always reflect the real value of a pension. It can sometimes be important, therefore, to obtain valuations of pension schemes from Independent Financial Advisers, both as to the real value of the pension at the time and the anticipated value at date of retirement. It is also necessary to obtain expert advice as to the amount of the pension that would be provided by a pension sharing order. Because women usually live longer than men the same CETV will produce a lower pension for a woman than for a man of the same age.
In the past, it was often difficult adequately to provide for a wife’s income in the event of her husband’s death after retirement. Now a wife can have her own pension unaffected by death of her ex-husband.
However, the cost of setting up a pension sharing order (usually £750) may mean that it does not make economic sense for a pension sharing order to be made in respect of pensions with a small CETV.