How are pensions dealt with when a couple divorces?

Q. My husband and I are divorcing and his pension policy is worth approximately the same amount as our home. He has suggested that I retain the house and he retains his pension. Is this fair? How are pensions dealt with when a couple divorces?

A. Pensions are potentially significant assets which must be considered when deciding how a divorcing couple’s assets will be divided. Often, pensions are one of the most valuable assets a couple holds.

Pensions can be dealt with in one of three ways, which are explained below:

Pension Sharing Order

If a pension sharing order is made, a percentage of one spouse’s pension is immediately transferred to the other spouse. The spouse receiving the pension uses their percentage to set up a pension in their own name, which they can then add to (if they wish) and receive when they retire. This pension is entirely independent of the pension of their former spouse.

Pension Attachment Order (Earmarking)

If a pension attachment order is made, on retirement of the pension scheme member a portion of their pension is paid to their former spouse. The pensions are not independent of each other and the spouse receiving the pension will not receive any payments from the pension until their former spouse retires. The control over the pension remains with the pension member. If the pension member dies then their former spouse’s benefit received from the pension will cease, unless specific provision is made. It is for this reason that pension attachment orders are rarely appropriate.

Offsetting

It is possible to agree to ‘offset’ pension claims. In this situation, the spouse with the pension may agree not to claim a share of, for example, the former matrimonial home, on the basis that no claim will be made against their pension. The pension member will then receive their pension in its entirety on retirement but will have given away their share of the former matrimonial home to their spouse. Offsetting will be appropriate in a wide variety of cases. It is crucial, however, to consider the value of the pension that is being given up. If one spouse is considering agreeing to pension offsetting they should also consider how this will affect their income in retirement, especially if they have not made any other provision for their retirement.

For more information, or to discuss any aspect of family law, contact Janine Hutson on 01772 258321 or at janine.hutson@harrison-drury.com