Pensions and Divorce – What you need to know
This is a complex area. Pension orders are only one of the range of options open to the court when considering the whole of the ancillary relief position and how best the matrimonial assets should be divided. What order to make depends upon a number of factors which are set out in the Matrimonial Causes Act 1975.
The usual staring point in the division of the marital assets is one of equality.
A pension is an investment made during your working life designed to produce an income for you when you retire. It is a future income source.
There are two types of pension schemes:
A money purchase scheme
This is the type of scheme used by most private employers. Usually, the employee contributes a percentage of his/her pay, and the employer also makes a separate contribution. The fund has a value that is used to buy an income (annuity). Most workers will now have some form of pension scheme through a workplace pension (Nest is an example).
A final salary scheme
This type of scheme is common for people employed in the public sector (civil servants, NHS employees, police and local government employees etc). Upon retirement, the income is usually related to the number of years employed and the final salary of the employee. A lot of these schemes have been or are being phased out.
There are variations and there may be a combination of both with an employee seeking to make up missing pension contributions also funding an additional private pension through “AVC’s” Additional Voluntary Contributions.
Regardless of which pension exists, they can all be valued. In a money purchase scheme, the value is usually the value of the investment units. In a final salary scheme for divorce purposes it is the CEV (Cash Equivalent Value). This represents the notional value of your share of the pension fund.
The first step is to find out the value (the CEV) of the pension fund from the pension scheme administrators. This represents the notional value of the pension fund expressed as a capital sum. IT IS NOT AVAILABLE CAPITAL. You have to reach the appropriate age to be able to benefit from it and some schemes fix the age that it can be paid at. It is not the same as the equity in the home and generally speaking the CEV and the value of the other assets are not comparable. The pension represents a future income stream.
The court has the power to make the following types of order on divorce:
A pension sharing order
Dividing the value of the pension fund. Sometimes, this is achieved through an external transfer to a new fund in the name of the other spouse, sometimes it is simply transferred off into the name of the other spouse through an internal transfer. Internal transfers may be the only option available in some public schemes. Because the pension is a source of income, the court can adopt two approaches which may achieve different results. A simple division of the pension fund may produce equality of the CETV but may not produce equal income for each party. This is because factors such as sex and age/life expectancy affect the amount of pension (annuity) that can be bought. It may be necessary to obtain expert help from a pension actuary on the correct way to divide the pension as clearly, for some people there will be a greater need for a reasonable income in retirement.
A pension attachment order (income)
Sometimes called “Earmarking”. This is an order that on retirement the future income from the pension is to be diverted to the other spouse. The problems are that payment ceases upon the death of the pensioner and cease if the spouse to whom it is paid remarries. There may be tax implications with earmarked pensions.
A pension attachment order (lump sum)
This is an order that on retirement all or part of any lump sum from the pension is to be diverted to the other spouse. Unlike the income order, this survives remarriage.
A pension attachment order (death benefit)
This is an order that all or part of any of the death benefits from the pension is to be paid to the other spouse. Remembering that most pension schemes also provide some form of insurance cover so that a lump sum is payable upon death in addition to any pension benefit and that lump sum may be available if the pension scheme member dies before retirement. This is used as an additional security to cover maintenance payments which would finish upon the death of the payer.
Finally, the parties may decide to offset the value of the pension against one of the other assets e.g. the house equity.
Most schemes make a charge for effecting the transfer of the funds and a decision will need to be made as to who pays these costs. Some schemes charge as much as £1500.00 so it is not an inconsequential consideration.
Once an order is made, the administrators of the pension scheme have 4 months in which to implement the order.
Advice from our divorce Solicitors
If you have any questions regarding this article or any other matter regarding pensions and Divorce, please get in touch with our experienced divorce solicitors who form part of our team of family law solicitors.
