For many who go through a divorce or dissolution, a crucial question is what might happen to any pensions. Often one spouse might have substantial pension provision and the other might have limited or no pension provision, perhaps because they took time out from working to look after children.
At Rix & Kay, our Family Team is happy to advise you in relation to all financial matters on separation, and have many years experience in dealing with even the most complicated pension arrangements.
While spouses/partners are married or in a civil partnership, they can generally expect that when their spouse/partner retires, they will benefit from their pension income, and in the event of their spouse/partner’s death, might expect to receive a surviving spouse’s pension. On a divorce or dissolution, those benefits are lost.
It may be that both spouses have similar pensions. However, typically one spouse has a much smaller pension provision than the other person.
The courts have long had the power to take pensions into account when dividing up the matrimonial assets.
How the values of pensions should be shared between spouses can be typically handled in three different ways:
This is where one person keeps their pension, and in return the other receives a greater share of the remaining capital, for example by receiving a larger part of the family home. One drawback with this arrangement is that whilst the non-pension owning person receives a greater share of the marital assets up-front, they do so at the expense of retirement security later on.
Pension Attachment Order (formerly known as Pension ‘Earmarking’)
This Order requires a pension company to pay a certain percentage of the pension holder’s lump sum and pension income to the other spouse. There are certain disadvantages to a Pension Attachment Order. Your payments stop should you remarry, and you must wait until your former spouse starts receiving their pension before you can receive your share. If you re-marry or your spouse/partner dies prior to their pension coming into payment, you may never get the benefit of those pension payments.
Pension Sharing Order
This is the most usual way for pensions to be divided and means the pensions are divided at the time of the divorce or dissolution. A share of a person’s pensions is transferred to their spouse/partner, either within the same pension scheme or to a different pension scheme. Your share now becomes your pension and is linked to your retirement – you do not have to wait until your spouse/partner retires, and their death or your re-marriage does not affect your entitlement.
It is important to realise there is no “automatic” entitlement to a share of your spouse/ partner’s pension. It is often not as simple as granting one spouse or civil partner 50% of the other’s pension. Pension entitlement following a divorce or dissolution is more complex than that, and calculating how to divide the pension assets can be a complicated process.
It is essential you take expert and specialist advice before making any decisions or agreeing to anything relating to the pensions.
Within divorce or dissolution proceedings you will be asked to contact your pension provider to obtain the ‘transfer value’ of your pension. This represents the amount of money that would be transferred if it were to be moved to another scheme.
In certain cases, it will be necessary to instruct a Pension Actuary to calculate the ‘true’ value of the pension and how much of the pension needs to be shared in order to equalise income on retirement. Valuing a pension fund is one thing – working out how to distribute it is quite another. There are a number of factors to consider when handling the division of pension rights in a divorce and it is important to take advice on this at an early stage.