On divorce or dissolution of a civil partnership, the respective financial resources of a separated couple must be considered when assessing the extent of the “matrimonial pot” for distribution between the separating couple.
This “pot” of assets typically includes capital assets, including property and pensions.
The starting point, in medium to long marriages, is that pensions should be shared equally. The court’s approach is to address any significant imbalance in spouses’ or civil partners’ pension positions. Due to the nature and composition of pension assets and differing pension rights/benefits from scheme to scheme, it is often advisable to obtain a pension report from an actuary (pension specialist).
How does the court deal with pensions on divorce?
The court has various powers in respect of the orders it can make concerning pensions on divorce, including:
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Pension earmarking and pension attachment orders
These types of orders provide that when the pension is drawn, all or part of the tax-free cash benefit and/or pension income will be provided to the scheme member’s former spouse. However, pension attachment/earmarking orders have become uncommon as they do not allow for a ‘clean break’ between the separating couple. Furthermore, the person in whose favour the order was made would be limited by the fact that they could only begin to receive their pension when it is drawn by the other party. In light of these drawbacks, pension sharing orders were introduced in 2000.
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Pension sharing
This order is where a percentage of one spouse or civil partner’s pension is transferred out of their existing pension scheme into a separate scheme in the other spouse or civil partner’s name. Pension Sharing Orders are common within divorce or dissolution proceedings as they allow the pension assets to be severed and distributed at the time of divorce or dissolution. Even though a recipient of a pension cannot access the pension until the rules of their pension scheme permit, a Pension Sharing Order allows the separated couple to achieve a ‘clean break’.
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Pension offsetting
This is not a pension order but a concept whereby an individual will retain their pension(s) or a proportion of their pension(s) without sharing it with their spouse/civil partner but will receive a lesser share of the assets elsewhere. Offsetting may be useful for a spouse who is willing to forgo a pension sharing order to achieve a greater share of the liquid capital, for example, to meet their housing needs.
Finding out how much the pensions are worth
To determine how much the pension funds are worth, in the first instance, both spouses or civil partners should obtain the Cash Equivalent Transfer Value (CETV) of their pension(s)from the relevant pension providers.
How does the court determine what percentage of a pension should be shared?
The starting point will be full financial disclosure. The separating spouses or civil partners will provide full details of all of their pensions including the CETVs and details of any benefits under the scheme(s).
The separating couple will then need to consider whether they need the input of a pension on divorce expert (PODE) or an actuary to provide a pension report. If following the exchange of financial disclosure, it is apparent that the separating couple have similar pension positions (e.g. same pension schemes and similar CETV value) and the couple are young then it might not be appropriate for their be a pension sharing order.
However, whilst on the face of it two pensions may look as though they have a similar value, the benefits received under a pension scheme can be very different and this may not be fully reflected in the CETV.
If the separated couple opt for a pension report, it can cover a number of points, including:
- Pension sharing based upon equality of capital – The expert will divide the pensions in accordance with the cash equivalent transfer values of the pensions.
- Pension sharing based upon equality of income – The expert will calculate what pension share will produce equality of income in retirement.
- Offsetting – The expert can calculate what offsetting figure is required to allow a spouse or civil partner to retain their pension or a larger proportion of their pension. .
What factors can affect the share of the pension benefits?
The court will take into account a number of factors when determining how to divide assets following divorce or dissolution, which are set out at Section 25 of the Matrimonial Causes Act 1973. For example, the court might consider the length of the marriage, the earning capacity of the separating couple and whether their respective needs are met (“needs” being a subjective concept which is interpreted generously in accordance with the marital standard of living).
The separating couple will also be presumed to have made an equal contribution to the marriage, irrespective of their actual practical or financial contributions to day-to-day married life. The court prioritises meeting needs over protecting pre-marital assets and therefore the more common approach now is to focus on achieving equality in respect of pension assets as a whole, regardless of when they were accrued.
Implementing the pension share
If the separating couple are going through Financial Remedy Proceedings, then the spouse or civil partner applying for a financial order can specify on their application (i.e. the Form A) that they are seeking a pension sharing order.
The separating couple will then have to disclose details about their pension(s) in a document called a Form E which must be exchanged before the first court hearing, known as the First Appointment. The applicant (i.e. the person who has applied for a financial order) must serve any application for a pension sharing order on the pension provider.
Once the appropriate pension sharing split is determined and a financial order has been approved by the court, the pension provider must be sent the following:
- A copy of the sealed financial order
- A copy of the pension sharing annex (setting out details of the pension share to be implemented)
- A copy of the decree absolute (if the divorce petition was issued before 6 April 2022) or final order (if the divorce application was issued after 6 April 2022)
- Payment for any pension sharing charges
A pension sharing order takes effect from the date of decree absolute/the final order or 28 days from the pension sharing order being approved by the court. The pension provider then has four months to implement the transfer. However, the time limit is subject to receipt of all relevant documentation.
It is important to note that the cash equivalent value of the pension(s) being transferred are recalculated on a date within the implementation period called the “Valuation Day”. It is therefore important that implementation is not delayed.
The “Transfer Day” is the date on which a pension sharing order takes effect and the spouse or civil partner receiving the pension credit becomes legally entitled to the same.
There is no doubt that dealing with pensions on divorce can be a complex matter, however a specialist family law solicitor can work with you to help to ensure that pensions are considered as part of any financial settlement.
