A recent report suggested that just eight per cent of divorce settlements fully consider the assets of a spouse’s pension fund.

That means that the vast majority of couples dividing their wealth ignore potentially one of their most significant financial assets.

Your clients may not be aware of quite how important it is to look at any pension fund when negotiating a divorce settlement. It may well simply not be something that springs to mind for them.

As their advisors we need to make sure that their needs are best served. That includes pointing out issues they may have overlooked and then advising on the best place to get expert help to delve deeper.

Pensions are often glossed over simply because they are too complicated. It takes an experienced professional to sieve through the mechanics of a spouse’s pension fund and then come up with a way of splitting it fairly.

One of the main reasons a pensions actuary, forensic accountant and a family law expert are likely to be needed is to assess the actual value of a pension fund – often one of the hardest things in the divorce settlement process.

This is particularly important when valuing occupational pension schemes, such as those in the armed forces, police service and NHS. There are at least 100 different methods of calculating the value of a pension and to make a comparison fair, Woolley & Co often needs to get an expert to come up with the relevant figures.

There are recent cases where a pension fund value assessment has been increased by almost a third by getting a professional valuation. When you are talking of pension funds which can be as much as £600,000, like with a GP or senior officer in the armed forces, that is a difference of some £200,000.

A basic guide to pension treatment on divorce

If the marriage fails, there is no automatic entitlement to a spouse's private or occupational pension, but there are a number of different roads couples can go down to tackle pension assets depending on their circumstances. These are offsetting, earmarking and pension sharing.

These days, pension sharing is the preferred route of most divorce courts but offsetting and, to a lesser extent earmarking, are also still valid in some cases. This is why it is vital you advise your client to discuss their options with an expert in the field.

Offsetting involves balancing the pension fund against other matrimonial assets, such as the house. For instance, the wife might cede the pension fund to her husband in return for a larger share of, or all of the profits from, any property.

With earmarking, the court awards a percentage of the pension income to the former spouse. This seems fairly straightforward and fair. However, it has numerous disadvantages which is why it has fallen out of favour. For instance, the income stops on the death of the pension holder or if the wife remarries.

The Welfare Reform and Pensions Act 1999 (WRPA) paved the way for pension sharing. This allows one party the opportunity to secure a percentage of their spouse’s pension rights and to put that percentage into their own name.

This is preferable in many cases because a person can feel more in control of their own future, they can decide when they retire and it can be paid to children or a new spouse if the person dies before they retire.

There are also rules about when a pension can start being paid. For example, in a recent case the husband had two pensions. One was a private pension scheme paying out on the husband’s 50th birthday or at any time thereafter, and the other was an occupational scheme which paid out when the husband reached 60. The husband was five years older than the wife. The rules provide that the occupational pension scheme can only be paid out to the wife on her 60th birthday, five years after the husband could begin receiving his pension income.

The negotiations in that case concentrated around the wife taking the entire private pension scheme, which she could start to benefit from at any time after her 50th birthday, and less of the occupational scheme which would only pay out from the wife’s 60th birthday.

Ultimately, anyone not happy with the decision of the court and final settlement for a pension decided during a divorce does have the right to take up the case either at appeal or through the Pension Ombudsman. But by giving the right advice to clients in the first instance and pointing them towards trained professionals, we can ensure the first outcome is the right one.

Woolley & Co is interested in talking to specialist IFAs and pension experts who can advise our clients and conduct detailed pension valuations and reviews on their behalf. Please contact Andrew Woolley to discuss how you could become involved.

Detecting those hidden assets

Discovering a hidden £10 million, scrutinising a business to give it a value of £100 million or concluding a £5 million capital gains tax assessment are all in a day’s work for forensic accountant Alf Pare.

Find out how Alf, a consultant with Prime Chartered Accountants in Coventry, has been delving into money matters for divorcing couples for the last 21 years and how his investigative skills could help your clients.
Read the full story here.