Pensions on divorce

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.