Alex Walmsley, a trainee solicitor in Harrison Drury’s divorce and family law team, looks at how pensions are dealt with when a couple divorce.
Pensions can often be the most significant financial assets to be considered when negotiating how a divorcing couple’s assets will be divided.
Pensions can be dealt with in one of three ways in a financial settlement. These are explained in more detail below:
Pension sharing order
If a pension sharing order is made, a percentage of the spouse’s pension which has the higher value, is immediately transferred to the other spouse’s fund. The spouse receiving the transfer uses it to increase their existing pension fund, or to set up a pension fund in their own name. They then have the choice to continue to contribute to the fund as they work and will receive a pension from the fund on retirement. This “new” pension is entirely independent of the pension of their former spouse.
Pension attachment order (Earmarking)
If a pension attachment order is made, it is applied when the spouse with the higher pension retires. Pension administrators will then be ordered to pay a portion of the pension to the former spouse. The pensions are not independent of each other and the receiving spouse will only collect payments from the pension when their former spouse retires. The control of the pension remains with the former spouse.
If the former spouse dies, benefits received from their pension will also cease, unless specific provision has been previously made. For this reason, a pension attachment order (earmarking) is rarely appropriate and seldom ordered by the court.
Offsetting the value of a pension
It is possible to agree to ‘offset’ pension claims. In this situation, the spouse with the significantly higher 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 spouse with the higher pension will then receive their pension in its entirety on retirement but will have given away their share of the former matrimonial home or another capital asset 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 consider how this will affect their income in retirement, especially if they don’t have a pension fund, and have not made any financial provisions for their retirement.
It may also be necessary in cases where one, or both, of the spouses has a reasonably significant pension, to employ an actuary to evaluate the true value of the pension. An actuary will also be able to calculate the amount of pension share required to equalise the parties’ incomes in retirement to ensure that a fair settlement is achieved.
For additional information on financial settlements, or for advice on any family law matter, contact the divorce and family team on 01772 258321.