The courts have long had the power to take pensions into account when dividing up the matrimonial assets. Very often one spouse might have substantial pension provision and the other might have none or limited pension provision, perhaps because they have given up a job to look after children. That spouse may wish to be “compensated” for their lack of pension entitlement. While spouses/partners remain married, one might legitimately expect that when their spouse/partner retires, they will benefit from their spouse/partner’s pension and, in the event that anything happens to him/her, might expect to receive a surviving spouse’s pension. When parties divorce or dissolve a Civil Partnership these benefits are lost and the person with little or no pension provision is often concerned that he or she has little or no provision in his or her own right and little chance of being able to rectify that within their remaining working life. Of course, it may be that both spouses have similar pensions or one party may have a larger provision than the other. However, typically in pensions and divorce, the problem arises where one spouse has very little provision and such pension entitlement as there is belongs to the other person. It is important to realise there is no “automatic” entitlement to pension sharing.
People often seem to think that just because they have been married or have entered into a Civil Partnership they are entitled to half of everything – including the pension. That is not the case. Pension entitlement following a divorce or dissolution is far more subtle than that, and the calculations in deciding how to divide the pension assets between parties can be a complicated process. This is why it is essential you take expert and specialist advice before making any decisions or agreeing to anything. 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. You will usually be sent an annual statement from your pension provider which should give the ‘transfer value’. 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.
How the values of pensions should be shared between spouses can be typically handled in three different ways:
Pension Offsetting This is where a Court or Arbitrator can decide to allow one person to keep their pension and award the other a greater share of the other capital. For example, the family home. However, one drawback to this can mean the non-pension owning person receives a greater share of the marital assets up-front, but at the expense of retirement security later on.
Pension Attachment This kind of agreement, (formerly known as Pension ‘Earmarking’), means that when the pension finally pays out, a portion of it is reserved for the other person, but the problem with this type of order is that you have to wait until your former spouse retires before you can receive it. You may also never get the benefit of this type of Order if you re-marry or die prior to it coming into payment.
Pension Sharing This is the most usual way for pensions to be divided and means that one spouse can lay immediate claim to a percentage of their partner’s pension pot and move the money to another pension fund at the time of the divorce. Unlike a Pension Attachment Order, there is no wait for their partner to retire and it means there can be a cleaner break upon divorce. It also allows each person more direct control over their finances. Parties who obtain a Pension Sharing order are protected against remarriage, delayed retirement or death of their former spouse.
In the UK many people have what are called ‘money-purchase’ pensions where we put money into a pension every month and the fund grows until the day we reach retirement. At the point of retirement that fund is used to buy an annuity which then provides an income for the rest of our lives. At the moment, the cost of buying an annuity for a woman is often higher than for a man. This is because statistically women live longer than men and hence, need a larger sum of money to buy the same annual income over the period of their retirement. Please note however that recent European regulations mean this discrepancy will be addressed and it is expected that the cost of buying an annuity will reduce for women and increase for men.