What options do I have in relation to pensions?
In most divorces an issue that must be dealt with carefully is that in respect of the distribution of assets and property. This is especially so in respect of the division of a pension. This article will discuss what happens in respect of a pension during divorce and how such pension is split by the court.
When an individual is applying for a divorce or dissolution they will always be advised to obtain a financial order in order to set down the arrangements for the division of marital assets. It must be noted that the Court has the power to redistribute pensions held by the parties if it is decided that it is the fair thing to do.
In England and Wales the Court will only make a financial order to split a pension if there is to be a final decree of divorce that is a decree absolute which will terminate the marriage, or of the decree has already been obtained. Pensions are usually the second largest asset that has to be divided in divorce cases after the family home. However, unlike other assets, pensions are unique in their nature and as a result the amount that each person is entitled to needs to be calculated carefully. As such it is necessary for each party to give the Court and their spouse details of all their pension rights, including any relating to their present or previous job and any resulting from membership of a personal pension scheme. The percentage of the pension that would be transferred from one spouse to the other can be calculated by either the total value of the pension, known as the cash equivalent transfer value (CETV), or the regular income that the pension will generate for each person. It should be noted that because of the complexity of pensions a 50/50 split will not necessarily produce an equal pension income to both people when they retire. The main reason for this is that there may be a difference in life expectancy and the couple may be of different ages.
There are three options when considering how a pension should be split and these are:
This is when the value of the pension is offset against the value of other assets held between the couple. As a result this means that the Court would not make a pension order and the right to the pension would remain with the pension scheme member. For example, pension offsetting can be used when one person wants to keep the family home at the expense of any future share of their spouse’s pension that they might be entitled to. However, the Court will currently treat capital and pensions as two very separate issues.
This is an order that asks the pension provider to pay a percentage of the pension to the other spouse. Such a percentage will make up a share of either the pension income, the pension lump sum, or both. Such payment will be made when the pension becomes payable to the spouse originally holding the pension.
This is a method where an existing pension is split and divided between the couple at the time the financial order comes into effect. An order for pension sharing can share a part of the pension or pensions between the husband and wife and would thus provide the new recipients with their own separate pension fund.
Deferred Pension Sharing
This used where there is to be a pension share, and the pension holder is already retired and is receiving the pension income but the spouse who is to receive the pension share has not retired and is too young to receive a pension. In this case, there is an agreement to share the pension at a later date, but this is more complicated than a standard pension sharing order.
Deferred Lump Sum
The party who will benefit will receive a lump sum payment from his/her spouse’s pension when the spouse retires.