Pension Treatment on Divorce
Did you realise that your pension could be a considerable capital asset? You certainly should be aware of this if you are going through a divorce.
How Courts deal with pensions is often clouded in confusion and complication. Pensions can be complex and confusing at the best of times. But just because they are complicated doesn’t mean they should be ignored.
The issue is ignored at your peril. The details need to be addressed carefully by a specialist lawyer aided by an experienced IFA if you and your lawyer think that is necessary.
The courts have long had the power to take pensions into account in dividing up the matrimonial assets. Frequently, one person has a substantial pension and the other might have none or a very limited pension provision because, for example, they have given up their job to look after the children. That person was always likely to be "compensated" for their lack of pension entitlement but until just a few years ago, this tended to be said to be accomplished by being “given” more than 50% of the house.
Being realistic, it is normally the wife who has the lowest (if any) pension provision. While the marriage continues the spouses no doubt assume that when the husband retires the wife will benefit from his pension and might expect to receive a surviving spouse's pension from his pension provider if he dies before her. When they divorce these benefits are lost. Often then the wife has little chance of being able to sufficiently build up a pension during any working life that may be left to her.
But it is important to realise that there is no "automatic" entitlement to a spouse's pension. It is often thought that just because they have been married they are entitled to half of everything - including the pension. That is not the case. The Court looks at all the facts and figures in each case.
Divorce Courts often regard the most appropriate solution for the division of the matrimonial assets and pension rights as “offsetting”. Certainly people who can come to an out-of-court settlement will usually use offsetting of the pension fund value against other matrimonial assets such as the house.
Offsetting is often a sensible approach. However for wealthier or older couples the retirement benefits might be worth more than other assets of house investments etc. This can make offsetting financially impossible, as there is insufficient other assets to compensate for loss of pension.
Another approach is “earmarking”. A Court can award a former spouse a percentage of the income the other spouse gets; if for example a couple divorce after a pension has become an income source (known as the pension being in payment). There are disadvantages to this solution such as the income ceasing on the death of the pension holder and also the pension entitlement ceasing if the recipient of the ear-marking order remarries.
In recent years the Welfare Reform and Pensions Act 1999 (WRPA) allowed “pension sharing” on divorce. This basically allows one party the opportunity to secure a percentage of their spouse’s pension rights and to put that percentage into their own name. Without getting too technical, in effect part of the pension fund is transferred out of the fund of one spouse and into a fund in the name of the other. Clearly, this will be preferred by many even if only because you then feel more in control of your own future pension and can decide when you want to retire. There is also a benefit that it can be paid to children or a new spouse if you die before you retire.
In our opinion the process ought to be roughly:
- Find out what pension provision there is (we mean what there really is, not what the person holding the pension says there is!)
- Decide with your lawyer if the amount of the pension and the facts of your case make further investigation justifiable (i.e. cost versus benefit).
- Investigate fully; almost certainly aided by a specialist IFA (your lawyer will be able to recommend someone).
- Decide how to adjust the settlement in the light of this knowledge.
- This article just “scratches the surface”. It is essential to take advice from a specialist divorce lawyer, supported by a knowledgeable IFA.
Article written by Karen Agnew-Griffith. Karen handles many large and complex divorce cases involving pensions and trusts. Based in Norfolk Karen has clients throughout the country and overseas.
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