After property, the largest asset on a divorce (or dissolution of civil partnership) is usually the couple’s pensions. The overall aim in divorce financial remedy cases is to achieve fairness between the parties. This applies to pensions as much as to other assets but they can be difficult to value and to divide.
It is often the case that one spouse has a significantly larger pension than the other where, for example, one spouse gave up their job to look after the children and the other was the breadwinner or one spouse had the benefit of a more generous final salary scheme with their employment.
In these cases, Divorce Financial Settlements can correct that imbalance. This can be achieved either by “offsetting” or by a “pension attachment” order or, most commonly, by a “pension sharing” order.
If you are getting a judicial separation, the court will not have the power to make a pension sharing order. The only options available to you will be offsetting or obtaining a pension attachment order.
Offsetting is the process by which your right to receive a present or future pension benefit is traded for capital or money now. For example, you might forego a pension in return for a larger share of the proceeds of sale of your house.
However, you need to think carefully about any settlement along these lines because liquid assets and pensions are different in nature. The difficulty lies in comparing very different types of asset e.g. a pension as a future whole-of-life income stream, against cash, housing or other non-pension assets. Offsetting of pensions needs to be calculated carefully; it is important that you know the value that you might be losing, retaining or acquiring.
A Pension Attachment Order against your spouse’s pension has the effect of redirecting part or all of the pension income to you, but only when it comes into payment. However, there are certain disadvantages including the fact that it cannot provide for a clean break and that the income is lost if your ex-spouse dies, or if you remarry. You also can’t receive any payment until your ex-spouse decides to draw their retirement benefits, which they might deliberately delay for tactical purposes. For these reasons, Pension Attachment Orders are now very rarely made.
Pension attachment orders can be useful in certain cases, such as where there is a very large age gap between you and your spouse and the pension in payment currently assists with paying one spouse maintenance from that pension income, which might be lost if a pension sharing order were to be made. It is also one of the only options available on a judicial separation.
A pension sharing order provides for a specified percentage of the Cash Equivalent (CE) of a pension to be transferred to the other spouse. Effectively, it divides the pension between the couple giving the other party a pension in their own right.
Pension sharing orders are now the most common method of dealing with pensions on divorce. They have the effect of enabling a spouse without a pension to acquire, on divorce, a pension in their own right unaffected by the death of their ex-spouse or their own remarriage, giving them greater control of their own future finances. They can also help the parties to obtain a “clean break” on divorce (see Divorce Financial Claims) if that is what they want.
A pension can only be divided by order of the court, not by private agreement. Any agreement to share a pension must therefore be recorded in a court order (which can be by consent rather than through court proceedings) to ensure that it is effective against the pension provider.
The Cash Equivalent or CE, is the cash value of pension benefits which have accrued to or in respect of a pension scheme. It is only the starting point in valuing pensions. The limitations in CE figures need to be clearly understood and it is likely that expert valuation and advice will be required to do this.
One of the most difficult aspects of pension sharing orders is calculating how much a pension is worth. CEs do not always reflect the real value of a pension. Only in some cases is it appropriate to share pensions according only to their CE and without the assistance of a pension’s expert, for example, where all pensions are Defined Contribution schemes with no guarantees and the parties are of a similar age and there are no complicating features. CE’s of Defined Benefit and public sector schemes are often a poor reflection of their true value (or benefits) for the purposes of divorce. It means the true benefits or income that are available from those pension schemes can vary widely from what their CE values alone might otherwise suggest.
More usually than not, it is appropriate to obtain valuations of pension schemes and the options available on divorce, from a Pensions on Divorce Expert (PODE) , both as to the real value of the pension at the time and the anticipated value at the date of retirement. Advice may also be needed on matters such as where the pension assets are likely to exceed the Lifetime Allowance after or as a consequence of a pension sharing order. State pensions need to be taken into account too as these can give different benefits for each party depending on the ages of each party and contributions made to the Additional State Pension and are a valuable asset that should not be overlooked.
In particular, occupational pension schemes, final salary schemes and those of people in the armed forces, police service and NHS often require specialist valuations. It is important for all pensions in the same case to be valued on a consistent basis.
Once it has been decided what percentage of the total value of the other spouse’s pension you are to receive, that percentage, called the “pension credit,” is transferred into an existing pension, a new pension or an extra pension as part of the existing scheme, but in your sole name.
The imapct of Pension Freedoms
Since 2015, pension freedoms have enabled people to access their private pension funds, subject to tax, from age 55, and this increased freedom applies to recipients of pension sharing orders. It has given greater opportunity to make a “reverse pension sharing order” for example where a spouse over 55 takes the benefit of a share of the younger spouse’s pension (subject to tax) to raise capital for re-housing. This means specialist advice should be sought about the options available with pensions on divorce.
One potential issue with Pension Attachment Orders in place is that there is potential for some to try and thwart the original intention of the order by using the new flexibility of the pension freedoms. Therefore, individuals with existing Pension Attachment Orders against their ex-spouse’s pension may be advised to take immediate legal advice as to whether the attachment still provides for what was intended or whether an application should be made to the court to seek to vary the order or preserve the pension (by injunction or undertaking) from being accessed in a way that was never previously intended.