What options do I have in relation to pensions?
One of the assets which can cause the most problems in negotiations relating to financial settlement is the division of a pension. Some people hold a strong view that the pension fund is due to their hard work so why should the other party benefit - completely forgetting that the other party may have given up work or worked part-time whilst raising the family, which has meant they have been unable to increase their own pension fund, or that the fact that childcare was covered allowed them to be able to work and contribute to their pension!
Many also wish to retain their pension in full and are quite happy for the other party to retain the matrimonial home, or the majority share, or keep other assets instead. If the other spouse would benefit more by retaining other assets then this option is likely to be approved by the Court.
In the modern age, it is increasingly common that the parties will have pensions of roughly equal value as both have worked throughout the marriage, and this has also been assisted by the introduction of workplace pensions. In this case it is likely that each party will retain their own pension. If there is to be a division of the pension, what options are available?
In England and Wales the Court will only make an order in relation to a pension if there is to be a final decree of divorce that is a decree absolute, or final dissolution of a civil partnership. 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 for 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:
Pension Offsetting (formerly Pension Earmarking)
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 rather than any future share of their spouse’s pension that they might be entitled to. It is important to note, however, that if a person receives ready cash instead of a percentage of the pension, it does not work on a pound for pound basis and the lump sum is likely to be less than the amount of pension that would otherwise have been transferred.
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. As the Court is in favour of acheiving a clean break between the parties at the earliest opportunity, this type of order is not used very often.
This is the order which is most commonly made and is when part of an existing pension is transferred into a pension fund held by the other spouse. A pension sharing annex will be prepared, providing details of the pension share to be made, and this will be sent to the Court with the final financial order for approval. The sealed annex will then be sent to the pension provider together with a copy of the financial order and a copy of the decree absolute / final dissolution order.
Deferred Pension Sharing
This is 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.
It is essential to note that the pension provider is likely to charge an administration fee for implementing any orders in relation to pensions and this fee can be quite substantial. Some will need the fee paid separately but others will also give the option of the fee being deducted from the pension fund. It is therefore important to consider any administration fees when deciding whether a pension order is appropriate.
It is also recommended that the person seeking a pension order obtains the advice of a financial advisor as to how the pension will benefit them and, if it is a pension share, to determine whether the pension to be received should be paid into an existing pension fund or whether it would be better in a separate one.