Pensions - retiring gracefully
Published in My Money - A Woman's Guide to Finance
Just eight per cent of divorce settlements fully consider the assets of a spouse’s pension fund. Here Karen Agnew-Griffith, of family law specialists Woolley & Co, Solicitors explains how to make pensions count.
There are no hard and fast rules regarding your financial rights in the breakdown of a relationship.
There will often be a range of possible solutions to dividing the assets, and it could be that a couple comes to an amicable agreement, with lawyers simply drafted in to formalise the agreement. Unfortunately though, in many cases, courts will be involved in deciding the division of assets.
The financial split can be affected by many factors, including the age of those involved, the length of the relationship, and the needs of each party and any children, and will routinely address income, property and savings.
A pension is often the largest or second largest capital asset in a marriage and so should be taken into account by a couple and their representatives when arranging a divorce or dissolving a civil partnership.
But pensions can be complex and confusing at the best of times, and are all-too-often glossed over, leaving many people unknowingly with a lot less than they are entitled to. The details must be thoroughly scrutinised by an experienced family law expert and, in some cases, an expert or a pension actuary brought in to help.
Frequently, one person has a substantial private pension and greater state pension and second or additional state pension, (from National Insurance Contributions) while 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.
If we’re honest, it is normally the wife who has the lowest – if any – pension provision, as it is assumed during the marriage that she will share in the benefit of the husband’s pension income when he retires. The pension is for both of them in effect – until things go wrong.
If the marriage fails, there is no automatic entitlement to a spouse's private or occupational pension. In addition, there are rules which allow one divorced spouse to take National Insurance contributions from the other to make up deficiencies in their basic state pension. This is after Decree Absolute and is subject to particular rules.
After a divorce, it is often the case that the wife has little chance of being able to sufficiently build up a pension of her own during any working life that may be left to her.
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.
In this day and age, 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 discuss your case and unique set of circumstances with an experienced family lawyer. This will give you the best chance of a fair, expedient outcome taking into account all pensions each parties has.
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 or all of the profits from any property.
Anyone considering this route though should think about it very carefully because of the different nature of capital assets and pensions. Pensions are not liquid assets, and, as such, can only be turned into cash on retirement. Their value on retirement could be much higher than at the time of assessment.
With earmarking, the court awards a percentage of the income the other party gets from the pension 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 third option, and the one which is the preferred choice in the majority of cases these days, is pension sharing.
Thanks to the Welfare Reform and Pensions Act 1999 (WRPA), 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 rather than being dependent on an ex-husband, they can decide when they retire and if the recipient dies before retirement, the pension investmentit can be paid to children or a new spouse.
It is important to note that when a pension is divided or shared, this does not mean that the recipient 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.
There are many different types of pension plan and this also needs to be considered. We can put you in touch with appropriate experts who can help you make the right decision about any pension investment (also known as pension credit) you receive. If you are the individual losing part of your pension we can also refer you to experts who can assist with advice as to how best to make up the loss if that is something you wish to consider.
There are rules about when a pension can start being paid and these have changed in recent years. This is part of the overall picture that needs to be considered. For example, a 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 the case would likely concentrate 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.
A pension sharing order cannot take effect during a divorce procedure but is dependent on the Decree Absolute being granted, the final stage of the divorce process. The provider of the pension arrangement will then have four months to put the pension credit into place.
The pension provider must provide the former spouse with information about charges associated with the transfer within 21 days of receiving the pension sharing order to ensure everyone is clear on what fees are associated with making the changes.
Once the provider has completed the necessary calculations and completed the pension credit, a notice of discharge of liability will be issued to both parties. This will show the value of the pension debit and pension credit, the remaining fund value to the pension holder and how the parties have paid the charges.
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.
One of the most difficult tasks when resolving pensions and how they should be shared is the actual value of a pension fund. 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, it can be necessary to get an expert to value the pension or pensions especially where the assets include different types. There are recent cases where a pension fund has been increased by almost a third by getting a proper valuation. When you are talking of pension funds which can be worth from £500,000 to £1 million or more such as a GP or senior officer in the armed forces may have, that is a significant difference.
Anyone who is involved in a divorce and needs to investigate a claim on a pension fund should not assume that all will be well, they will get treated equally and so pay the process little heed.
Expert advice and guidance from experienced professionals is the only way to ensure you are not left rueing the financial split while getting over the emotional break-up.
Woolley & Co advises that the process on considering pensions in a financial settlement should be as follows:
- Find out what pension provision there is both private, company and state pensions.
- Decide with your lawyer if the amount of the pension and the facts of your case make further investigation justifiable (ie, cost versus benefit).
- If you wish to push ahead, investigate fully, often helped by a specialist IFA or pension actuary.
- Decide how to adjust the settlement in the light of this knowledge.