When a marriage breaks down most people focus on the family home. However, for many couples, pension savings built up over years represent an asset worth considerably more than the house and the law provides clear tools to ensure that they are dealt with.
Understanding how pensions are treated on divorce could make a significant difference to your financial security in retirement.
Pensions are included in a divorce settlement as they form part of the “matrimonial pot” of assets to be considered on divorce. The Court has wide discretion to make orders in relation to pension rights which can include not just the value accrued during the marriage, but in some cases the entire pension fund is taken into account.
There are two main approaches the Court take in relation to pensions:-
Pension Sharing
A Pension Sharing Order splits the pension. A specified percentage of the pension fund is transferred to the other spouse who then has their own independent pension pot. This creates a complete break of pensions as the receiving spouse is not affected by what happens to the other person’s pension in the future.
Pension offsetting
Rather than splitting the pension, one spouse retains their pension in full whilst the other party receives a greater share of the other marital assets e.g. the family home to compensate them for not receiving any of the other’s pension pot. Whilst this option avoids the administrative complexity of pension sharing, it does require careful consideration, not least as a pension and a property, for example, are very different type of assets.
The standard starting point to value a pension is the Cash Equivalent Transfer Value (CETV). However, this can sometimes be misleading. For example, a defined benefit pension provides a guaranteed income for life and its true value can be considerably higher than the CETV suggests. If your spouse holds a public sector pension, e.g. teacher, civil service or police, the final salary schemes can be exceptionally valuable and substantially higher than the CETV figure suggests.
Pension contributions made before the marriage or after the date of separation may be treated differently. Each case is dealt with on its own individual facts.
It is not always necessary to go to Court to deal with pensions. Many couples resolve pension and financial matters through negotiation between solicitors or through mediation without the need for a contested hearing. However, any agreement should be incorporated into a consent order which should be approved by the Judge to ensure that the terms are legally binding.
Depending upon the value of the pensions and the particular circumstances, a report from an actuary, a pension on divorce expert (PODE) will be required to establish the appropriate calculation to equalise pension provision on divorce.
Pensions are one of the assets to be considered when looking at all the financial matters on the breakdown of a marriage or civil partnership. A pension sharing order requires specific wording and needs to be implemented by the pension company.
Pensions are an important aspect of any financial settlement and should not be ignored. If you have any queries in respect of how to deal with pensions and other assets on the breakdown of your relationship please get in touch with RJT Solicitors on 01257 228027 or email us at info@rjtsolicitors.co.uk
