Pensions on divorce

In order to reach a financial settlement in divorce proceedings it is necessary to obtain the cash equivalent value of any pension acquired during the marriage.

This is the value the pension fund would have if it was transferred out of one scheme into another on a given date. A cash equivalent value is not exactly the same as cash. A cash equivalent value is basically the right to buy a pension for a given amount of money at some date in the future.

Types of pensions
Pensions are often defined contribution schemes, also known as money purchase schemes. With these pensions the benefits are provided by sum of money accumulated over time. The accumulated sum is used at retirement to provide an income, such as by way of buying an annuity. Lots of private pensions are this type of scheme.

In the public sector pensions are often part of a defined benefit scheme, where the benefit payable is defined as an amount according to a formula at retirement. Examples of such schemes would include civil service, NHS and teachers pensions.

Ways of dealing with pensions
Off setting
Frequently the only significant assets owned by a couple when they separate are the family home and one pension (often accrued by husband). For example, a family home with an equity of £100,000 and husband’s pension fund with a CE value of £50,000. Instead of saying that the former family home should be sold and the proceeds divided equally between husband and wife and the pension should also be divided equally, another way of dealing with matters which might make more sense would be to say the wife should have the house and the husband should retain the pension. This would provide accommodation for the wife and possibly children whilst allowing the husband to retain a substantial asset.

Earmarking
The difficulty with offsetting is it may not provide the wife with the possibility of a pension at all. This might particularly be the situation for older women who had never worked or only worked part-time. The husband might still have an earning capacity and can build up pension provision whereas the wife would not be able to do this. In order to address this problem earmarking was introduced as a possible solution. With earmarking the courts have the power to earmark a certain percentage of future pension benefits for the benefit of the wife. This would usually take the form of an order addressed to the trustees of the husband’s pension fund directing them to pay a given percentage of his future pension benefits to the wife. This would apply to both any lump sum he might receive and also to the pension payments he would receive.

The wife would only receive any benefits when the husband takes his pension entitlement. If he were to die before taking either of these then the wife would lose any benefit of an earmarking order. Earmarking is something which is always capable of being varied and so does not create a clean break between husband and wife. For these reasons earmarking is uncommon in practice.

Pension sharing
Pension sharing means that a court can order a pension provider to split a pension so that both husband and wife have separate, independent pensions. There is no requirement that they should be split equally. The percentage which will be transferred to a pension, usually for the wife will depend on the circumstances of the case. If, for instance the wife has already received the bulk of the other assets of the marriage she might not receive as much as 50% of the husband’s pension. With pension sharing the wife no longer has to wait until her ex-husband takes his pension benefits in order to take her pension benefits. She has her own independent pension provision and will not lose this pension if her husband happens to die before reaching pensionable age.

The pension is split at the given date. The pension trustees inform the court that the husband’s pension fund has a certain value at a given date. The pension is split using that date and these figures. The wife will not benefit from any further contributions paid into the pension fund by the husband from that date onwards. The husband is still able still able to rebuild his pension provision if he wishes.

There can be significant costs in pension sharing. A pension provider may seek up to £2000 to implement a pension sharing order.

Pension sharing requires a court order.

Problems with valuing pensions
How pensions are taken into account will vary greatly from one divorce case to another. For example, if both spouses are fairly young and have negligible pension provision it may not an important part of any settlement. If both husband and wife have been working during the marriage they may have fairly comparable pension provision.

The CE value of a pension does not necessarily value a pension accurately. For example, people working in the public sector often have rights to retire early while taking a full pension. The value of such a pension is not necessarily accurately reflected in its CE value. A pension to a person in good health is in reality worth much more than the same pension to a person in poor health. Women tend to live longer than men and so a given pension pot will typically provide less by way of pension income for a woman than for a man.

In cases where the value of pensions is substantial it may be necessary to instruct an actuary in order to work out what the effects of various methods of dealing with the given pensions would be in retirement.

Child support

The Department for Work and Pensions (DWP) is now responsible for the child maintenance system in Great Britain. It both funds information and support for separating parents and runs the child maintenance schemes. As of the beginning of 2014 all CSA maintenance cases will be closed or transferred to the new Child Maintenance Service

The government is keen for families to make their own private arrangements for child support.  However if they cannot do this there are other options.

  • The Child Maintenance Service (CMS) which is available for those parents unable to make their own arrangements can provide something known as Direct Pay. The CMS will work out payment amounts due but will not get involved in collection or enforcement. This can be a good option for parents who cannot agree how much payment should be.
  • The CMS can get involved in enforcing the payments. This cannot be set up within 12 months of a consent order. There is a fee of £20 to use this service.
  • CM Options is another service provided by CMS to give information and support to parents to help them decide what to do about child support. The website to refer to is www.cm options.org

Child Maintenance Calculator
This calculator (on the CM options website) can give you and idea of how much you can expect to receive or pay in child maintenance.

CM Calculator

The formula for working out payments
(Gross income is defined as before tax and NI is taken off but after pension contributions are deducted)

Gross weekly income up to £800    BASIC RATE applies
One child            12%
Two children            16%
Three more children        19%

Gross weekly income between £800 and £3000    BASIC PLUS applies to the excess over £800

(£3000 is the highest gross that will be taken into account)
One child            9%
Two children            12%
Three or more children    15%

e.g. Andy has three children and has a gross weekly income of £1200 after deduction of pension. To calculate child support he would have to use the basic plus rate.
Andy will pay 19% of £800 = £152. He will also have to pay 15% of £400 = £60. Total £212

Default maintenance position
If parents cannot agree on how much maintenance should be paid the paying parent might have to pay a default rate based on the number of children until the CMS has the information required

One child            £39 a week
Two children            £51 a week
Three or more children    £64 a week

Note that the age limit of the child has increased to 20 from 19,  provided the child is eligible for child benefit

Second family children
Second family children living with the non-resident parent (NRP) are referred to as the ‘relevant other children’. The number of ‘relevant other children’ in the household reduce the gross weekly income of the NRP by a percentage as follows:

For one ‘relevant other child’ reduce gross weekly income by 11%, for two relevant other children reduce gross weekly income by 14% and  for 3 or more relevant other children reduce gross weekly income by 16%

Eg Peter earns gross £500 a week, after deduction of pension.  He has 2 children not living with him by his ex-wife and 1 child by his new partner.  To calculate child support deduct £55 (11% of his gross income). This leaves a balance of £445. For the 2 children not living with him he pays 16% of the balance, £71.20

Reduced rate for gross income between £100 and £200 a week
The amount of maintenance to be paid is worked out as a flat rate of £10 in the first £100 of gross income plus a percentage of the gross weekly income over £100. The percentage varies according to the number of qualifying and relevant other children to ensure that liabilities increase smoothly as gross income increases from £100 to £200.

Parents on benefits will pay a flat rate of £10 a week

Shared Care
If parents share care of their children, then the amount of maintenance to be paid by the non-resident parent can be reduced to reflect this. If there is to be shared care arrangement that the number of nights spent with the non-resident parent is 1 then a deduction of one seventh will be made. If two nights a week are spent with the non-resident parent then a deduction of two sevenths will be made.

Eg Chris has 1 child with his ex-wife who does not live with him.  Chris earns £450 gross per week, after deduction of pension.  His daughter Amy spends 1 night a week with him.  He is liable to pay 12%, £54 a week, less one seventh, £7.70 so Chris will pay £46.30 a week.

Principles guiding decision-making –‘Section 25 factors’

A court will always take into account the needs of a child under 18 as a priority when financial matters are being resolved. In addition Section 25 (2) (b) of the Matrimonial Causes Act 1973 sets out a number of factors which the court should take into consideration when deciding on applications made in divorce proceedings.

These are factors that any separating couple might like to take into account when they are reaching their own decisions, bearing in mind that they may wish to obtain the court’s approval to the terms of any financial agreement they reach.

The factors are:

  1. The income, earning capacity, property and other financial resources which each of the parties has or is likely to have in the foreseeable future, including in the case of earning capacity any increase in that earning capacity which it would, in the opinion of the court, be reasonable to expect a party to the marriage to take steps to acquire.
  2. The financial needs, obligations, and responsibilities which each of the parties has or is likely to have in the foreseeable future.
  3. The standard of living enjoyed by the family before the breakdown of the marriage
  4. The age of each party to the marriage and the duration of the marriage.
  5. Any physical or mental disability of either of the parties to the marriage.
  6. The contributions which each of the parties has made or is likely in the foreseeable future to make to the welfare of the family, including any contribution by looking after the home or caring for the family
  7. the conduct of each of the parties if that conduct is such that it would in the opinion of the court be inequitable to disregard it
  8. in the case of proceedings for divorce or nullity of marriage, the value to each of the parties to the marriage of any benefit (for example, a pension) which, by reason of the dissolution or annulment of the marriage, that party will lose the chance of acquiring.

In addition in respect of pension arrangements the court must look at

In the case of paragraph (1) any benefits under a pension arrangement which a party to the marriage has or is likely to have and
In the case of paragraph (8) any benefits under a pension arrangement which, by reason of the dissolution or annulment of the marriage, a party to the marriage will lose the chance of acquiring

Ages and stages of children

Divorce and Separation: What is best for my child?

At almost every stage of their development, the most important thing for a child to know is that they are not to blame for their parents’ divorce or separation. This can be expressed in words, but must also be communicated in parents’ actions. A second consistent need for children of all ages but particularly for younger children is predictability, routine and structure.

Key features for each age-group:

From birth to 1 years old: Children learn to bond with one or both of their parents. They need to learn to form healthy attachments and experience stable and secure relationships. Children of this age will show distress by crying excessively, by having feeding or sleeping problems or by being withdrawn, irritable and depressed.

1 to 3 years old: During the toddler years children start to use language, begin to explore the outside world and start to want to exercise control over what happens to them. Often they can’t remember people who they don’t see often. They need to know that a loving parent is available to them and they thrive on security, love, and flexibility. A distressed child of this age may be withdrawn or clingy or may change his eating or toilet habits. Crying that lasts for more than twenty minutes is an indicator of distress. Extreme distress may result in developmental delay.

3 – 5 years old: Between 3 and 5 children start to engage more with the outer world and start to form their first friendships with other children. They begin to understand why their parents set limits or make rules. They become better at remembering people who they do not see all the time. They need consistent discipline. They need to be free from direct parental conflict. Many may benefit from spending time with each parent separately. Distressed children of these ages may regress in toileting, sleeping and eating. They may be irritable and clingy or show signs of anger or behavioural problems.

5 – 8 years old: At this age children begin to differentiate more between fantasy and reality. They start to notice gender difference and their relationships with other people start to deepen. They also develop a strong sense of fairness. It is important at this age to maintain structured and consistent time with each parent. Parents should also support their school and extracurricular activities and their expanding friendships and interests. A child this age who is distressed may complain of constant headaches, tummy aches etc. They may have trouble sleeping. They may wet the bed or use baby talk. They may begin to start to blame one or other of their parents for the separation.

9 – 12 years old: Children need to develop self-esteem and feel good about their friends and their physical development. They start to form their own values and test those of people around them. Their peer group becomes more important to them. They need to know that parents are there to give support when they need it. They need to know it is OK to love both of their parents even if they are not together, and they need to be able to communicate with their parents about their feelings. A child of this age who is distressed may withdraw from their friends and from social activities. Some compensate for distress by becoming ‘too good’. Others manifest rebellious behaviour or depression.

Adolescence: Teenagers being to develop greater independence from their families. Their sense of morality may strengthen. In forming their own identities they may need to express resistance and disapproval of those around them. (Just like the two year olds who need to say No a lot). They can be naturally self-centred. They want to be treated with flexibility and understanding. They may want a greater say in how parental contact is structured. They need positive role models. They need to be given consistent boundaries. Distress can be expressed by excessive anger, negativity and isolation. Others may try to be ‘perfect’. Some find school or friendships difficult. They may experiment with alcohol, drugs and sexual promiscuity.