Things you need to know about pensions when getting divorced

Pensions are often shared on divorce, here are a few key reasons to explain why.

Pensions are considered a joint matrimonial asset. Even if the pension is only in one spouse's name, it was likely built up during the marriage through the combined efforts and income of both spouses. The law views pensions as joint property that should be fairly divided, just like the family home or other assets.

Pensions provide for the future financial needs of both spouses. Pensions are a major source of retirement income. Sharing the pension helps ensure both ex-spouses have sufficient income later in life, rather than just the pension holder.

If pensions are shared it can facilitate a full and final settlement by splitting the pension into two separate pensions. This avoids any ongoing financial entanglement and spousal maintenance payments between the ex-spouses after divorce.

In England, Wales and Northern Ireland, the total value of all pensions must normally be considered and considered for division upon divorce, regardless of when they were accumulated.

In Scotland, only pensions built up during the marriage are considered.

The court views different spousal contributions as equal. Even if one spouse took time off work to raise children, allowing the other to build a larger pension, the law treats these differing roles and contributions to the marriage as having equal importance and value.

So, in summary, pension sharing upon divorce is legally required to be considered, provides for the future needs of both ex-spouses, and is viewed by the courts as the fair way to divide what can often be the major joint asset built up during the marriage.

There is also something called pension offsetting. The key difference between pension sharing and pension offsetting when dealing with pensions during divorce is:

Pension Sharing

1.     Involves splitting one spouse's pension fund into two separate pensions - one for each ex-spouse.

2.     A court order transfers an agreed percentage of one spouse's pension to the other spouse's own pension fund.

3.     Provides both ex-spouses with independent pension funds they can manage separately.

4.     Offers the ability to have a clean financial break upon retirement.

Pension Offsetting

1.     Does not split the pension fund itself. Instead, the value of the pension is offset against other matrimonial assets.

2.     One spouse keeps their entire pension while the other spouse receives a greater share of other assets like the home or savings to offset the pension value.

3.     Can provide a clean break without dividing pensions, but one spouse may have inadequate retirement provision.

4.     Generally simpler and cheaper than pension sharing but can be difficult to fairly value assets against future pension income.

In summary, pension sharing physically divides one pension into two new pensions for each spouse, while offsetting allows one spouse to keep their entire pension in exchange for the other spouse receiving more non-pension assets of equal value. The choice depends on factors like pension size and the other assets available.

The other consideration is pension earmarking, but it is rarely deemed fair or appropriate in most cases. It is a court order that allows a portion of one spouse's pension benefits to be paid to their former spouse or civil partner upon divorce or dissolution of the civil partnership, but it does not share the pension pot. Important points to note are,

1.     The court can order that a specified percentage of the pension income, tax-free lump sum, or lump sum death benefits be paid to the former spouse when the pension holder starts drawing their pension benefits.

2.     It does not create a clean break between the divorced parties, as there is an ongoing financial link until the pension holder retires or dies.

3.     The earmarking order remains attached to the pension even if it is transferred to a new provider.

4.     The amount received by the former spouse can vary depending on factors like the pension holder's retirement age, salary changes (for defined benefit pensions), or investment performance.

5.     The earmarking order ceases if either party dies or if the former spouse remarries or enters a new civil partnership. This is a major problem if the person receiving the pension income depends on it to meet their outgoings.

 

The important point to note about pensions is that they can be complicated assets to deal with. There is a very helpful guide about pensions that was updated at the beginning of 2024. It has been prepared by the Pensions Advisory Group and it is called “A guide to the treatment of pensions on divorce (second edition)”. It can be a good place to start in terms of gathering information about the issues to be considered on divorce.

In some situations, it may be necessary to seek an expert report from a reputable and qualified pensions expert. They can give guidance on the issues that need to be considered in particular cases and they can also prepare calculations for how to share pensions to provide equal income on retirement or how to treat a situation where the parties are considering pension off setting.

We work with pension experts in mediation too, so couples have the advice and support they need to make informed decisions about their pension assets. If you would like to talk with us about how to deal with pensions in your divorce situation you can either book a free call with us via our website – www.familymediationandmentoring.co.uk or call us on 0800 206 2258 or email us at hello@familymandm.co.uk.

 

 

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