Pensions are often one of the most valuable assets to consider in a divorce or dissolution of a civil partnership, but they are often misunderstood when it comes to considering the financial settlement, and at times overlooked in terms of an asset that a party should protect in the event of divorce.
It is important to note that on divorce or dissolution all pensions will be included in the matrimonial pot and be available for distribution whether or not they were accumulated pre-marriage or post-separation. The only exception to this is if the parties have entered into a Pre-Nuptial, or Post-Nuptial Agreement, the specifics of which we outline further in this blog. To that end, it is not uncommon for parties to enter into relationships already having a pension. In the event that the marriage breaks down, the pension value may form part of the matrimonial pool available for distribution between the parties. If a pension split occurs, it can affect a person’s retirement plan or position, and significantly effect their standard of living or the quality of life that they had envisioned following retirement.
Can my spouse take half my pension during a divorce settlement?
The starting point is that pensions should be shared equally (i.e. 50/50). However, there are legal arguments a spouse or civil partner can make to try and depart from equality (e.g. if the case involved a short marriage and there were considerable pre-marital pension contributions by one spouse or civil partner). However, each case is fact specific and legal advice should be taken to determine the most appropriate approach to take.
Pensions are also complicated assets in that very often the Cash Equivalent Transfer Value (“CETV”) that is stated on a person’s annual pension statement is misleading in terms of the annual income that the pension will produce in retirement. Achieving equality in respect of pensions is therefore not as simple as adding up the parties’ respective pension CETVs and dividing the total figure in half.
When the court looks at achieving equality in respect of pensions, it is generally looking at re-distributing the parties’ pension assets to ensure that they both have the same pension income in retirement.
How are pensions transferred in the event of divorce? Pensions will be transferred out of their existing pension scheme and into a pension in the other spouse or civil partner’s name. They may be able to be a member of their ex-spouse’s pension scheme, or they may have to enter into a new pension scheme. Generally, any pension share will occur pursuant to a financial settlement and/or a pension sharing order.
Pension sharing orders allow pension assets to be carved out at the time of the divorce or dissolution enabling both spouses or civil partners to achieve a clean break. This means that the separated couple can build up their pension funds independently after the pension sharing order has been finalised.
Most pensions can be shared, including, those in payment. However, please note that a basic state pension cannot be shared nor can the new state pension (which replaced the basic pension and additional state pension from 6 April 2016).
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.
Having a better understanding of your pensions value
Too frequently state pensions are ignored in financial settlements – the value of your pension should not be overlooked. Depending on the circumstances of the case, an imbalance in the separating couples’ state pensions may result in the financially weaker party receiving a greater share of the private pension funds or available capital elsewhere by way of offsetting which is referred to later in this blog.
In terms of negotiating the division of pension assets, the starting point for both spouses is to exchange up to date financial disclosure. Both parties should obtain a Cash Equivalent Transfer Value (CETV) in respect of any and all pension schemes held in their names.
It should be noted that it can be costly to implement pension sharing orders and so often the court will suggest that parties’ each retain their own pension assets, assuming they are roughly comparable in value. However, any significant disparity must be addressed.
Pension offsetting
What is pension offsetting? It is possible for one party to “buy-off” the other parties pension claims – essentially providing the other spouse with additional capital in order to forego their pension sharing order. This approach is known as “offsetting”.
As an example, one spouse may have a pension worth £500,000; we can assume for illustrative purposes that the other spouse would be entitled to receive £250,000 from that pension scheme (albeit as above, the level of pension share required to achieve equality is seldom as simple as dividing the capital value in half). The spouse in possession of the pension may offer to provide their ex-partner with capital in lieu of a pension sharing order.
It is accepted by the court that cash paid upfront is more valuable than cash preserved in a pension which may not be accessed for several years, and so pension off-setting is not conducted on a pound for pound basis. In the above scenario for example it may be that the capital lump sum required to achieve an off-set amounts to say £180,000 - £220,000.
Use of Prenuptial Agreements in protecting pension during a divorce
So, how do parties who come into a marriage with a valuable pension, protect themselves in the event of divorce?
The best advice for any individual who has a significant pension and is concerned about potential pension sharing is simply not to get married in the first place; however, if that individual does want to proceed with a marriage then it would be strongly advisable to enter into a Pre-Nuptial Agreement well in advance of the wedding ceremony.
What is a Pre-Nuptial Agreement?
In short, it is an agreement is entered into prior to a marriage or civil partnership and the aim is to set out how asset shall be divided upon a divorce. The benefit is that these Agreements are generally entered into, and decisions made when the relationship is happy and harmonious, rather than clouded by anger or bitterness. Parties can also enter into Post-Nuptial Agreements after the wedding, which are sometimes utilised as a further tool to strengthen the terms of any previously entered into Pre-Nuptial Agreement, or they can be considered as stand-alone documents if a Pre-Nuptial Agreement was not entered into prior to the marriage/ civil partnership.
So, when do you need to think about entering into a Pre-Nuptial Agreement? The general advice is to consider a Pre-Nuptial Agreement as soon as a wedding is on the cards. Whilst a Pre-Nuptial Agreement is not actually a legally enforceable document in England and Wales, it still acts as a strong protective measure for parties entering into it. There are also requirements for Pre-Nuptial Agreements to be in a prescribed form, and adhere to certain safeguards, so that it can be considered legally valid.
For advice on dealing with pensions on divorce, or Pre-Nuptial Agreements please contact a member of our Family Team.
