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Pensions – What you need to know

10 February, 2015

More recently, pensions have become a much larger proportion of the family assets. For some couples one or both parties pension might be more valuable than the family home. Consequently, the pension must not be ignored when dealing with the financial position on divorce or dissolution of a civil partnership.

As with the majority of matrimonial assets, pensions are considered a joint asset to be divided between husband and wife as fairly as possible. In a lot of cases, the wife is not able to accumulate as large a pension as her husband, usually due to a reduced working life as a result of having children. Consequently the husband’s pension may be split/shared with his wife, earmarked or offset against other family assets. Of course the wife’s pension will also be taken into account and the value considered when dividing the husband’s pension.

So what’s the first step in deciding how a pension should be dealt with on divorce? The initial job will be to obtain a Cash Equivalent Transfer Value of the pension (commonly called the CETV). This can be obtained from the pension provider and one CETV should be provided free each year. The CETV is not an estimate of what the pension will provide on retirement but a current value of the benefits if it was drawn out of the pension fund and transferred to another pension proivider.

Once a valuation is obtained, there are three possible ways of dealing with the pension:

  1. The value of the pension can be offset against other marital assets. So for example the party with the pension keeps his or her pension in tact and receives a smaller share of the family home. Offsetting is difficult to judge. Pension benefits are not the same as cash or bricks and mortar. £1 of pension benefits is not the same as £1. However offsetting can be an ideal way of dealing with a modest pension, especially if the assets are limited.
  2. The pension can be subject to a Pension Sharing Order. If the pension is substantial enough to split, an order from the court can be obtained that will enable the party without a pension (or a smaller pension) to receive a share of his or her spouses pension. This pension share can be credited to an existing pension or in some cases, a pension can be set up within the spouses pension scheme.
  3. Finally it is possible to have a pension attachment order which in very basic terms allows the spouse without a pension or a smaller pension to receive a share of his or her ex spouses pension on retirement. These types of orders are used rarely due to the fact that  if the benefitting spouse dies before her/his ex retires or if she or he remarries before this time, the pension order reverts back to the spouse with the pension.

 

Pensions are a tricky area of divorce law and some pensions can be more difficult to assess than others. Final salary scheme pensions, police and armed forces pensions can be difficult to accurately value and sometimes it is advisable to engage the services of an Actuary to assist with valuing the pension. It should also be noted that generally speaking it is only the pension benefits accrued during the marriage that are relevant, those funds accumulated during cohabitation may not be included.

So as you can see dealing with the pension is not straight forward, however they can be extremely valuable. In order to avoid hardship in the future, pensions should be given as much consideration as the family home, neglect them at your peril.