Pensions & Divorce
Pension entitlements (also called “superannuation”) are usually the main security for a couple’s retirement. Therefore if a couple divorce it is important to consider whether both can be secure in the future. English law allows pensions to be shared (or “split”), or to “earmark” the income (that is to secure a set percentage of the payment).
Because there is such a variety of pensions, including state pensions and the State Earnings Related Pension Scheme (SERPS) as well as the issue of pension freedom, expert guidance is needed to ensure a fair arrangement. Foreign pensions also have to be considered.
Second to the matrimonial home, pensions are often one of the biggest assets in divorce, which is why it is so important to properly consider the most sensible way to split it.
In England, Wales and Northern Ireland, the Courts must take into account both parties’ pensions and pension rights in a divorce scenario. These include state pensions, workplace schemes and the personal pension plans of each party. In Scotland, a more mathematical approach applies; any increase in the value of your pension(s) from the date of marriage to the date of separation will also be considered by the Court when evaluating pension positions.
For a fair pension split, the first step is to find out the values of each party’s pensions. This requires asking your pension provider for a pension valuation, checking your latest annual statement for your pensions’ ‘transfer value’ (the amount you would get if you were to move your pension elsewhere) or, for more complex pensions, getting assistance from a solicitor and pensions actuary.
Current rules stipulate that basic state pensions cannot be split at divorce, although you may be entitled to claim a basic state pension using your ex-partner’s national insurance records. However, upon your remarriage, you will lose this pension entitlement. The additional state pension, which is built up in employment, can be split.
Pensions can be split in three ways:
- Pension sharing: This allows you to claim for a percentage share of your ex-partner’s pensions, the amount of which is transferred into a pension of your own name.
- Pension attachment: Otherwise known as ‘earmarking’, you can receive an agreed amount of your ex-partner’s net pension income or lump sum when it starts being paid to them. This option is more favoured by couples closer to retirement age.
- Pension offsetting: The value of any pensions is offset against other assets, so for example, you receive nothing of your ex-partner’s pensions but keep the family home instead.
In England, Wales and Northern Ireland, only a Court can make a Pension Sharing or Attachment Order, whilst in Scotland, a Pensions Sharing Agreement can be set up outside of Court.
Pension division can be complicated: there are strict time limits, rules as to how agreements are written and the need to liaise with pension trustees, and therefore attaining guidance from a specialist solicitor such as Brookman is strongly recommended.
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Pensions - Scenario Analysis Example #1
Mrs M consulted us. She was 52. Her husband was 54 and Chief Executive of an engineering company. He was likely to retire at 60 with a pension of half his final salary. He also had a private pension fund from years earlier. He argued that he had worked hard for his company pension and it was solely entitled to it. He proposed sharing the private pension fund.
We obtained a calculation that to replace half the future company pension benefit with a private pension fund would cost Mrs M £600,000. (This is a calculation called a “transfer value”) If Mrs M was to keep all the benefit she would need not only all the private pension fund but also more to provide an investment income. We settled the matter with Mr M agreeing to consent orders with a pension sharing order giving Mrs M all the private scheme and 25% of the company pension.
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