A newly published guide by the Pensions Advisory Group (PAG) has been released for legal professionals with an aim of providing more information and awareness of the treatment of pensions on divorce and avoiding ‘unintended discrimination’ against women.
It has been found that women can be disproportionately affected by unfair pension settlements as women reaching 65 now are retiring with pensions one fifth of the size of their partner’s due to lower salaries, career breaks, taking part-time jobs, and having caring responsibilities. As a result, splitting pensions down the middle will leave a woman much worse off.
So here’s my short guide to how pensions should be treated on divorce.
Pensions are arguably the most complex assets to evaluate when considering financial separation on divorce. It is so very easy, in comparison, to value a house. All too often divorcing couples will have the family home valued and avoid looking into the pension funds saying ‘I’ll keep the house and you keep your pension’. Whilst that may very well be a good trade off, depending on the figures, it is important to remember that a pound in a pension is not worth the same as a pound in the bank or a pound worth of equity in a house. If the pension funds are not properly valued on divorce, or even considered at all, there is a risk that one spouse may be getting the benefit of an asset that is worth a lot more in years to come than its face value.
The overall aim on divorce is to achieve fairness between the parties. This applies to pensions as much as to other assets and income. When calculating what a pension is worth, the starting point is often to take the CETV (cash equivalent transfer value) of a pension fund as the figure for basing the calculation upon. However, the CETV often does not reflect the real value of a fund and sometimes understates the value of the benefits it provides. With pensions being difficult to value and difficult to divide, the assistance of a pensions expert (an Actuary) may be required. The Actuary can advise on the benefits that one might expect to receive under a pension.
Division and Treatment of Pensions
Once a value has been attributed to a pension fund, there is no set formula on how the Court then divides pensions on divorce. Whilst it will often be fair to aim to provide spouses with similar incomes in retirement, equality may not be the fair result depending on needs, contributions, health, ages, the length of the marriage, or, in non-needs cases, the non matrimonial nature of the asset. Non matrimonial nature of the pension could mean what contributions were made pre marriage and post separation, and whether they can be excluded from the pot for division.
In a nutshell, pensions are made up of different components: tax free lump sums, these are seen as capital; the balance of the fund is viewed as deferred income; pensions in payment are viewed as an income stream.
It will depend upon the particular circumstances of each case as to how the Court considers it fair to divide pensions.
Pensions can be divided in the following ways:
- Pension Sharing Orders – a portion/percentage of the pension can be transferred to a separate fund in the other spouse’s name
- Offsetting – offsetting is the process by which the right to receive a present or future pension is traded for present capital (e.g. equity in a home or savings).
- Pension Attachment Orders – can be used to redirect a lump sum, part of a lump sum, income or death benefits to the other spouse
If you’re going through or contemplating divorce it is always sensible to take legal advice in relation to financial separation to ensure the best outcome for you. Contact Farleys’ family law team on 0845 287 0939 or submit your enquiry online