Pensions can be a very significant asset when it comes to computing the marital pot for the purposes of a financial and property settlement within divorce. One in three divorces involve people aged over 50, a time when it is particularly important to consider your retirement benefits.
Pensions are seen as an important marital asset and particularly in long marriages, this marital accrual is likely to be split equally when divorcing, particularly when one of the spouses has less of a pension pot and so has a need for these to be equalised. Pensions, may not have so much significance in a divorce, in which the spouses are much younger and still have sufficient time to contribute into their pensions. It is also the case that in a short marriage, an apportioned pension split may be more appropriate, meaning that only those pension contributions that were made during the marriage will be subject to a claim by the spouse, with the lesser pension benefits.
The pension options available within a divorce, include the following:-
A pension sharing order
This provides a clean break option for dealing with pension rights on divorce but will only be available where the Petition for divorce was served after 30 November 2000. For the purposes of a pension sharing order, a percentage of the member’s pension rights are credited to the former spouse of the member, as a pension credit, providing the former spouse with pension benefits in their own right. At the same time as the former spouse is credited with a pension credit, the member’s pension benefits are debited by the same percentage. As there are administrative costs involved in implementing a pension sharing order, it is most cost effective to make the minimum number of pension sharing orders possible, so if the spouse providing a pension credit to his/her former spouse, has a pension that will fund the entirety of the pension credit, this is better than having smaller pension sharing orders against a number of pensions. This is whilst also considering the various pensions held by the spouse with the greater pension value, and whether the cash equivalent transfer values of those pensions represent a fair value, i.e. one or other of the pension schemes may be under-funded and this has to be considered when determining against which pension, the pension sharing order should be attached.
In some cases, the pension credit can be implemented, such that the receiving spouse can acquire independent pension benefits in their own right and under their control, within the same scheme as the member spouse. This is known as an “Internal Transfer”. Some pension schemes will not however allow for this, in which case the receiving spouse will need to transfer their pension credit out into one of their existing pension schemes or into a new pension scheme. This is called an External Transfer.
People are advised to consult financial advisers who could help considerably, not only on the division of assets in divorce including pensions, but with long term planning following divorce.
Pension earmarking during divorce
A pension earmarking Order or pension attachment order can be made as part of a divorce settlement. This requires part of the member’s retirement benefits and all lump sum death benefits to be paid to their former spouse when the member retires or dies. It is available in relation to any divorce served in England and Wales from 1 July 1996 where the earmarked payment starts after 5 April 1997.
Any new orders will earmark a percentage of the member’s benefit for the former spouse, and orders made before December 2000 earmark a fixed monetary amount. Neither a State pension, nor a dependent’s pension can be subject to an earmarking order. The difficulty with pension earmarking, is that the member can control when any pension payments start, the pension payments will be taxed at the member’s income tax rate and pension payments to the former spouse will stop on the member’s death. In the same way, the pension will revert to the member upon the death or remarriage of the former spouse.
Pension offsetting
This involves the couple’s pension benefits being given cash values, normally based around the cash equivalent transfer values. These values are then accounted for within the marital pot. Each party will keep their own pension benefits with other assets being traded off against any disparity between the values of the parties’ pensions. This means that the party with a smaller pension will be allocated more of the couple’s non-pension assets. The difficulty with this is that offsetting is only possible if there are enough non-pension assets to carry out this trade-off and the cash/pensions need to be treated differently, in that pensions are contingent benefits, unlike cash and realizable assets.
Given the value of pensions, it is particularly important that parties obtain a pension report, and this is recommended by the Pension Advisory Group for all pension benefits over £100,000. This will provide both spouses with a full and comprehensive report setting out the options available to them.
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