Pensions and Divorce
As well as the emotional distress, divorce can create long term financial difficulties. The pensions of both parties in a divorce are formally declared on the ‘Form E’ along with other assets and are usually taken into consideration when the court decides what money goes where. If one spouse has never worked or taken time out to raise children, while the other built up a large pension fund, this will have to be taken into account.
The calculations can be complex. Company Pension schemes are usually valued at their ‘Cash Equivalent Transfer Value’ the amount of money all of the Pension benefits are deemed to be worth if the scheme member elected to move it to another Pension scheme. This includes not only the Pension income but must take into account auxiliary benefits such as lump sums, death benefits for children, the effects of inflation etc. Personal Pensions are more straightforward and they are usually taken at their fund value. Valuing a pension fund is only part of the process and we can provide you with an independent valuation. Deciding how to distribute it between the two parties is another matter.
There are three ways of handling the division of Pension rights in a divorce, although since new rules were introduced in 2000, the third option – ‘pension sharing’ – has become the preferred option for many – for reasons that will be obvious when you read on!
Here’s how they all work:
Since you can’t really split a pension down the middle, the court can decide to allow one partner to keep their pension and award the other partner a greater share of the family home, for example, to ‘offset’ the value of the pension. This may initially seem attractive, for example “you keep the house I’ll keep my Pension” However there are potential disadvantages for all parties eg a house can usually be sold with 100% of the proceeds payable as a lump sum tax free, whereas the maximum tax free amount for a pension is 25%. Conversely a pension fund is normally protected against creditors or long term care costs whereas a house is not. There are all sorts of potential implications of offsetting, some of which may not become apparent until it is way too late to do anything about it.
The majority view now tends to be that an equal division of all assets is the fairest method, but this in itself throws up a whole new set of problems!
2. Pension Earmarking
The court can also earmark one partner’s pension so that when the pension finally pays out, (and this could be in 20 years time!), part of the pension is reserved for the other partner. The problem with this method is that having divorced your husband or wife, you then have to sit around for years waiting for them to retire before you get any money. If they choose to retire late, you have to wait longer and if they die before retirement you can be left with nothing. Your pension income is left in the hands of someone you may not have seen for years (nor may you want to!) so you have to remain in contact and you cannot enjoy a clean break
3. Pension sharing (for many the preferred option)
On divorce, a spouse can now be entitled to half of the main breadwinner’s pension (whether it’s the husband or wife). This applies to the tax-free lump sum as well.
This means that one spouse can lay immediate claim to a percentage of their partner’s pension pot and move the money to another fund. They will no longer have to wait around for their partner to retire.
This means that there can be a clean break in the divorce and it allows each partner more direct control over their finances. Pension schemes will have to make a cash transfer available so that the other spouse can establish a new fund either with the exisitng provider, or if this is not possible with another Company.
The Government brought in the pension splitting law to prevent the what was usually the wife from losing out even if she remarries. Also, she is protected in case her husband dies, taking his Pension rights with him, before she draws her share of the pension, or if a husband decided to delay taking his Pension, as they would have to wait too long.
If you are getting divorced and are worried about how this affects your pension or if you need to transfer your pension rights to a new pensions scheme as a result of a Pension sharing Order issued by the Court contact Pension Matters and we can go through the options available to you.