A pension can often be the largest or second largest asset in a marriage or civil partnership. It is an asset the benefit of which will most likely be lost to one party on divorce if no account is taken of it. It is therefore essential that both parties’ pensions are considered and factored into any settlement.
There are a number of ways pensions can be dealt with on divorce. The 2 most common are:
- pension sharing
Pension sharing was introduced by the Welfare Reform and Pensions Act 1999 and is available where the divorce proceedings began after 1st December 2000. It is not available in judicial separation proceedings.
How does a Pension Sharing Order (PSO) work?
A PSO creates ‘pension credits’ and ‘pension debits’. The transferor i.e. the person transferring part or all of his/her pension is subject to a ‘pension debit’ whereby their pension is reduced by a percentage of the value of the pension as agreed and ordered by the Court
The transferee i.e. the person receiving the benefit of the pension share then gets a ‘pension credit’ for the same percentage.That pension credit must be invested either in the same scheme (an internal transfer) or in another scheme (an external transfer). Sometimes the transferee has no choice – this is dependant on the terms of the pension scheme in question. If it is a final salary scheme the position is a little more complex.
What pensions can be shared?
- personal pensions
- occupational scheme pensions
- retirement annuity contract
- the State Secured Second Pension/Serps
- pensions in payment
- pensions subject to income drawdown
PSO’s cannot be made in respect of:
- the basic state pension
- most overseas pensions
- death in service lump sums
In certain cases it may be possible to ‘offset’ other assets in lieu of a pension share.This may be suitable where the pensions are small so as not to incur pension sharing charges or where the party whose pension is to be shared wants to retain their pension in its entirety
However offsetting is not always easy to quantify because a pension fund is not the same as liquid capital such as money in the bank or equity in the family home and judicial guidance on this is not entirely clear. If offsetting is to be used the valuation of the pension may need to be adjusted to take account of some of the following:
- cash/property is available now whereas a pension is not
- age differences between the parties
- at least 75% of a pension attracts tax whereas transfers of property and lump sums do not
- if the pension pot was built up partly before the marriage or cohabitation an adjustment may need to be made
Other things to consider
Most pension schemes make a charge for implementing a PSO and you should also check what these are and agree who should pay those charges.
A PSO can only be implemented following Decree Absolute and with an Order of the court (whether made by consent or by the court following contested proceedings).
When a PSO is made the pension will be valued by the pension scheme on the “valuation date”. This may be some time after agreement has been reached between the parties or indeed since a valuation of the pension was obtained. The actual percentage shared could therefore be more than was envisaged if the pension has increased in value in that time.
The information in this Article is intended for guidance only.
It is essential that before agreeing to a PSO the terms of a pension should be checked and advice taken both from a solicitor and a pensions or financial advisor. In some circumstances it may also be necessary to seek advice from an actuary.
To discuss your particular circumstances contact our specialist family lawyer Karen Weiner for an initial discussion