Will I receive a share of my spouse’s pension in our divorce settlement?

A pension can be one of the most significant financial assets to consider when negotiating the division of assets on divorce. Harrison Drury’s divorce and family law team looks at the options for dealing with pensions.

Pension sharing order

A pension sharing order involves the immediate transfer of a percentage of one spouse’s pension to the other spouse’s pension fund. The spouse receiving the transfer uses it to increase their existing pension fund, or to set up a new pension fund in their own name. They can then opt to contribute to the fund whilst they work and they will receive their own pension from the fund on retirement. The “new” pension is entirely independent of the pension belonging to their former spouse.

Pension attachment order

A pension attachment order is applied when the spouse with the higher pension retires. The pension administrators will be ordered to pay a portion of the pension to the former spouse. Under this arrangement, the pensions are not independent of each other, so the receiving spouse will not collect the pension payments until their former spouse retires. Essentially, the former spouse remains in control of the pension.

In addition, if the former spouse dies, benefits received from their pension will cease (unless specific provision has been made). For this reason, a pension attachment order is rare and it is not ordered by the court very often.

Pension offsetting

A spouse may ‘offset’ the value of their pension against other assets. For example, the spouse with the significantly higher pension may agree not to claim a share of the former matrimonial home, or the other spouse’s business assets, on the basis that no claim will be made against their pension. The spouse with the higher pension will then keep their pension in its entirety but will have given away their share of the former matrimonial home or business asset (or other capital asset).

In many cases offsetting can be a suitable way to deal with a pension. It is crucial, however, to consider the true value of the pension that is being given up. If one spouse is considering agreeing to pension offsetting, then they should be mindful that this will affect their income in retirement, especially if they do not have their own pension fund and have not made any other financial provisions for retirement.

Cash Equivalent Values (CEVs) should be requested at the outset in order to ascertain the value of any pensions for negotiation purposes. In many cases it would not be suitable to treat the CEVs equivalent to sums of money as the CEV could be less than the true value of the pension. Therefore, it might be necessary to instruct an actuary to evaluate the true value of a pension, particularly in cases involving one or more significant pensions. An actuary will also be able to calculate the amount of pension share required to equalise the parties’ incomes in retirement, ensuring that a fair settlement is achieved.

For additional information on financial settlements, or for advice on any other family law matter, contact the divorce and family team on 01772 258321.