The division of intricate pension plans on divorce presents complex issues for divorcing couples, their legal advisors and family court judges. Should couples opt for a pension sharing order, a pension attachment order or should the pension be offset against other assets? Alternatively might a private agreement, negotiated independently of the court be more appropriate?
The lack of regularly reported cases involving pension division means it’s sometimes difficult to predict how a court might ultimately treat a pension in a particular case. We’ve already drawn attention to the comprehensive guide to the treatment of pensions on divorce written by the Pensions Advisory Group (PAG). It adds clarity to many key areas.
One of the authors of the guide, Judge Edward Hess gave that report added weight in W v H (2020). In his judgment in that case he made clear that the PAG report could often be relied upon to help answer questions regarding pension division. It’s therefore worth considering the issues that arose in W v H and how Judge Hess resolved them using the PAG report.
Pension Division and the case of W v H
The couple had been together for 17 years and had three children. The husband was 48 and the wife 50. The family home had equity of approximately £500,000; the husband had a pension valued at £2.2 million and the wife one of £153,000. The husband earned in the region of £150,000 per year. Judge Hess had to decide how to treat the pension in a way that would meet the needs of the parties. In doing so he addressed the following questions:
- Should the pension be divided so that the parties had equal income from it or so they had an equal share in its capital value?
- Could the husband keep the portion of his pension acquired before marriage entirely for himself?
- Should the pension asset be looked at in isolation or should its value be offset against other assets to achieve a fair settlement?
We’ll look at each of these issues in turn.
Equality of income v equality of capital
The decision whether or not to split the capital value of a pension or to look instead at the income it will generate in the future and ensure the parties get an equal share of that income will always depend on the facts of the case. As Judge Hess emphasised, there can be no ‘one size fits all approach’. However, referring to the PAG report explicitly, the judge reminded the parties of the true purpose of a pension fund – to provide income in retirement. With that in mind he indicated the fairest way to implement a pension share will often – though not always – be to provide equal incomes from the pension asset. On the facts of W v H, Judge Hess believed this was the best approach and made a pension sharing order to provide equality of income in the future.
Treatment of pension assets acquired before marriage
The husband had made significant contributions to his pension before marriage. He requested that the proportion of the pension that correlated to those contributions (42% of the total pension value) be excluded from the calculation of the pension’s value for the purposes of the divorce settlement. This would obviously have a significant impact on the wife’s share of the pension, and the judge believed that would result in unfairness. In a case like this, where use of a particular asset is required to meet the needs of a spouse following divorce, the fact that it is a non-matrimonial asset carries little weight.
Pensions and other assets
It’s not uncommon for one party to a divorce to seek to offset the value of his or her entitlement to a share of the pension against a share in some other asset. Often this will involve one party obtaining a greater share of the matrimonial home in return for a lesser share of the pension. In W v H the wife sough 100% of the family home in return for a reduction in her share of the pension. Judge Hess again highlighted the PAG report that recommends where possible avoiding this type of offsetting exercise because of the inherent risk of unfairness. Here Judge Hess indicated that to award the wife 100% of the family home as part of an offsetting exercise would be unfair to the husband, as he would be left unable to buy a home for himself.
Cases like W v H provide much-needed guidance in how to divide pensions on divorce. But the area is complicated and if you are going through divorce it’s essential to ensure you get specialist advice before agreeing on how to divide your assets, including your pension. At Brookman we deal regularly with high value, complicated divorce and the thorny issues that arise around pensions and other significant assets. For advice please call on 44 (0) 20 7430 8470 or contact us using the form below.