On divorce, your personal or workplace pension pot – often one of the biggest assets of a marriage apart from the family home – will be treated by the court as an asset.
This means that it will be taken into account when a divorce or civil partnership financial settlement is being hammered out – just like any property or possessions you own or cash you have in the bank.
Darren Francis, a family law solicitor at Humphries Kirk in Poole, explains how your pension will be divided on divorce and outlines how you can help ensure that this valuable asset is split fairly between you.
If a pension needs to be split between two spouses as part of the financial settlement, the first step will be to obtain an up-to-date value for the fund from the pension provider. Remember, that full and honest disclosure is required when assets are being divided so the proffered figure needs to be accurate.
Pension assets can be very complex, particularly if pensions are held in the public sector, ie. military, NHS, civil service, local authority, fire service. These pensions have very high income values and cannot be properly valued by reference to their notional fund values.
All pensions should be carefully considered as there are significant differences between public sector and self-invested funds. In the majority of cases, to obtain an accurate value based on sharing pensions it is calculated on equalising pension income and not capital. It is essential therefore to have an actuary’s report which will be commissioned through a solicitor to ensure that any order properly reflects the real value of the pension asset.
If the partners cannot agree, the court will decide in what proportions the pension pot should be split. It will not necessarily be split 50-50. Unless there is a valid prenuptial agreement in place, the court is not required to ring-fence pension amounts which were acquired before the marriage took place, but it may do so in certain circumstances.
There are several ways a pension may be used to ensure the assets of a couple are shared to provide a fair financial settlement on divorce. This includes:
- Offsetting – This allows the pension holder to keep their pension intact by offering other assets to their former spouse instead of taking a share of the pension. This has the advantage of allowing for a clean break, but if there are few liquid assets this may leave the pension holder with very little ready cash after divorce.
- Pension sharing order – This sees a pre-agreed percentage of one spouse’s pension fund being transferred into a pension fund in the other spouse’s name. Again, this option allows the parties to achieve a clean break and lets both parties build up a separate pension fund independently of each other. The final pay out for the original pension holder will obviously be smaller than it would have been.
- Pension attachment order – An agreed percentage of the lump sum and/or the pension income will be paid to the other spouse when the pension holder retires, based on the fund’s value at that time. This allows payment to be put on hold until the pension holder decides to retire, which means the other partner has to wait until that time – an uncertainty that many people would not be happy with. Other disadvantages are that no clean break can be achieved until retirement, and payments end when the pension holder dies or if the receiving party remarries.This is not ideal and should be avoided.
How can a solicitor help?
Our family law specialists can advise you on all the pros and cons of each option before a divorce financial settlement is agreed, to ensure that you make the right choice for your individual circumstances. They will also negotiate with the other spouse and their legal representatives so that you do not have to.