What happens to Pensions on divorce?

The Court have wide powers when it comes to financial issues on divorce but one of the most overlooked areas is the issue of pensions. Pensions can be shared on divorce, just like other assets, but they are also a complex area which often requires expert advice from a pensions actuary to properly consider.

The pension value for either spouse can be the most significant asset in a case. However, pensions are often not  an asset that is available immediately, subject to the age of the parties, and the purpose of a pension is of course to provide an income and lump sum in retirement which may be many years away. The Court do however have the power to divide pensions, regardless as to whether the asset is in payment or not.

In terms of procedure, upon separation the Cash Equivalent Transfer Value ("CETV") for any pension schemes held by either party should be obtained so that consideration can be given as to how is best to proceed. Transparency is needed to understand what your respective pension provision is. CETVs can take some time to be received so I would advise that a request is made early on following separation for this information to minimise any delay.

How can the Court deal with pensions?

In broad terms the Court have the power to make the following orders:

Pension sharing

This is the most common order. This means that a percentage of the pension fund is transferred into a separate pot in the other party's name and you would each draw down from your own individual schemes in retirement. With Police pensions, the receiving spouse's pension would remain with the Police pension scheme even if they are not working for the Police.

Pension attachment

This essentially means that a non-member spouse can "attach" to the pension payments received by their spouse and they receive payment of a portion of the lump sum and/or monthly income received when the pension is drawn down.

Such orders are quite uncommon as there is more risk attached to this type of order for the receiving spouse as payments would cease upon the death of the policy holder. This order also means that there is not a "clean break" which creates risk for both parties but more predominantly for the “paying” spouse. A clean break means that neither party can make a financial claim against the other as a result of the marriage and draws a line under such claims providing certainty and is generally the court’s preferred approach.

Offsetting

Offsetting is a process whereby one party retains more of the capital from other assets, whether it be the home or other savings, in lieu of a pension claim. It is possible to partially offset claims as it may not be possible in all cases to fully offset the value of the pension from other assets. It is important to remember that £1 of pension is not the same as £1 in immediately available cash and therefore expert advice is advised in relation offsetting calculations.

The starting position for division of assets on divorce is equality but the Court can also take "needs" into account, both in relation to capital and income. The individual circumstances of each case should be considered and there is not a "one size fits all" approach to dividing assets on divorce.

Pensions can be shared both by capital value and income value but individual advice will need to be taken as everyone's circumstances are different. A pensions actuary can comment upon the impact of both approaches.

Potential issues in relation to public sector/police pensions

Public sector pensions, such as police pensions, are more valuable than standard private occupational schemes and cannot be compared on a "like for like" basis against other types of scheme, even if the CETV is similar. Defined Benefit pension schemes, such as Police pensions, can also have a greater value than the CETV provides for.

Further, there is currently the additional impact of the "McCloud" remedy which is impacting on many police pensions at present. In affected cases, a portion of the newer 2015 scheme can be "rolled back" into the legacy scheme which will increase value. Many CETVs being produced now do include the remedy but it is important to check the position as the CETV may not be accurate if the remedy has not been applied. It is not just Police pensions affected by such changes but all public sector pension schemes.

Summary

Pensions are just one facet of the financial position that needs to be considered on divorce and each case is different. Early advice is recommended in relation to the financial issues arising out of a divorce so that you can fully consider the procedures and potential implications of the same taking into account your own circumstances. 

Pensions are also a complex area where expert advice from a pensions actuary is likely to be needed to consider how the asset may be fairly divided.

Pensions, whilst usually a future consideration, often represent the most significant asset in the marriage. Therefore, pensions are an asset which should be properly considered to provide clarity and certainty.