Divorce proceedings often entail the division of assets, including pensions, which can be a complex and crucial aspect of the settlement process. Pensions are regarded as marital assets and are considered alongside other assets of the marriage. In England and Wales, the total value of all pension rights, irrespective of when they were accrued, will be assessed.
Section 25 of the Matrimonial Causes Act 1973 outlines the factors the court considers when dividing assets in divorce or dissolution proceedings. While a 50-50 split is the starting point, the court aims to achieve fairness and strives to ensure that the needs of both parties are met. The court may therefore override this split if one party justifiably requires a larger share of the assets.
As of 6 April 2016, neither the old basic state pension nor the new state pension can be shared. However, in cases where a pension sharing order is issued by the court in divorce proceedings, one party may be ordered to share any extra state pension entitlement they have accumulated, including additional state pension or any protected payments.
There are three methods of dealing with workplace or personal personal pensions on divorce or dissolution: offsetting, attachment order, or pension sharing. All pensions must undergo accurate valuation and assessment to ensure fair division.
Offsetting
Offsetting involves balancing the value of a pension against other marital assets. In this scenario, one partner keeps the pension while the other receives a larger portion of the remaining assets. However, offsetting may not be possible if there are insufficient non-pension assets available for redistribution.
Attachment order
Pension attachment order works by allowing the partner without the pension to receive income and/or lump sum payments from it in the future. The pension benefits are said to be earmarked for their benefit.
Pension Attachment Orders function by allowing the partner without the pension to receive income and/or lump sum payments from it in the future. These pension benefits are earmarked for their benefit.
The court can also order that some or all of the survivor pension and/or lump sum death benefits be paid to the other partner in the event that the pension scheme member dies.
However, this arrangement comes with certain drawbacks for the individual without the pension, including:
- Having to wait until their ex-partner chooses to take the benefits or dies, to access earmarked benefits.
- No control over their ex-partner's investment decisions.
- Risk of receiving lower-than-expected benefits if the ex-partner chooses to take their benefits earlier or ceases pension contributions.
- Potential loss of future pension entitlement if they remarry or if their ex-partner passes away.
- Tax implications for the original pension scheme member, who still pays taxes on the whole pension income, potentially reducing the available pension income for the ex-partner.
Pension sharing
Pension sharing operates by splitting the pension benefits at the time of divorce. The party without the pension is allocated a share of the pension benefits, which are transferred into their name. Subsequently, the partner receiving the pension credit may be able to choose whether to keep their pension within the existing scheme or transfer it to a new pension plan. However, it's worth noting that certain pension schemes may not provide both options.
Pension sharing achieves a clean break. This means that the parties will know at the time of divorce how much of the pension they will receive. Remarriage or death of either party has no effect on the sharing order.
Providing an accurate value of the pension is crucial. Once the pension assets are quantified, the court will then consider the following:
- Whether the pensions were accumulated pre-marriage or post separation.
- The needs of any children of the family.
- The parties' financial means and standard of living.
- The health and age of the parties.
- Whether the parties are in a position to improve their financial position.
- The length of the marriage. The shorter the marriage the higher the likelihood that the pension assets may be excluded from the financial settlement.
- Contributions made to the marriage. The court views as equal the role of the income earner and the homemaker.
Depending on the complexity of the financial resources, it may be necessary to instruct a Pension on Divorce Expert to analyse what a fair outcome would be.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.