Pension Treatment on Divorce
A pension is usually the second most significant capital asset in a marriage or Civil Partnership. As such, it is important that pensions are considered in the financial settlement if a couple decides to divorce or dissolve their civil partnership.
Pensions can be complex and confusing at the best of times, but the details need to be addressed carefully by a specialist lawyer [find a lawyer] aided by an experienced independent financial adviser (IFA) if you and your lawyer think that is necessary.
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. You and your lawyer need to consider if that pension should be shared or if you should receive more of another asset, such as the home instead.
It is normally the wife who has the lowest (if any) pension provision, as the couple assume she will benefit from the husband’s pension when he retires. There is no automatic entitlement to a spouse's pension but the court will look at all the facts and figures in each case.
Divorce courts prefer to share a pension if possible between the divorcing parties. Another option however is offsetting which is where the pension fund value is “offset” against other matrimonial assets, such as the house. To offset a pension or part of a pension against another capital asset has to be done carefully because of the different nature of capital assets and pensions. Pension are not liquid assets, they can only be turned into cash at retirement.
It is important to note that when a pension is divided or shared this does not mean that you will receive a cash lump-sum. A pension or part of a pension that is ordered from one party to another still remains a pension and has to be invested in a pension plan. Woolley & Co, solicitors can help you find specialist advice if this is necessary.
Offsetting or sharing of a pension is more common than earmarking, another approach that is sometimes used. With earmarking the court awards a percentage of the income the other spouse gets from the pension to the former spouse. 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 earmarking order remarries.
Woolley & Co, solicitors advise that the process on considering pensions in a financial settlement should be as follows:
- Find out what pension provision there is.
- Decide with your lawyer if the amount of the pension and the facts of your case make further investigation justifiable (ie, cost versus benefit). There are at least a hundred different ways to value a pension. Further investigation can mean a drastic increase or reduction in the pension asset, frequently seen with Final Salary Pensions and with Government and Civil Service pensions such as those that teachers and members of the Armed Forces have.
- If you wish to push ahead, investigate fully, ideally helped by a specialist IFA or Pension Actuary (your lawyer will be able to recommend someone).
- Decide how to adjust the settlement in the light of this knowledge.
As mentioned above, pensions are a very complex area and a specialist lawyer should be employed to look into what you might be entitled to or liable for. Contact Woolley & Co here for specialist advice.
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