It has been almost 25 years since the family courts were given the unique power to share pensions on divorce, enabling them to transfer all or part of one person’s pension to another. Prior to this, a person who had not worked during the course of their marriage could have been left without any pension entitlement after a divorce. In circumstances where one person has accumulated a healthy pension pot due to the fact they have been able to work and build their pension pot without restriction, whilst the other has been taking care of the home and/or the children (as is usually the case) this seems grossly unfair.
Although the ability to share a person’s pension upon divorce goes some way to remedy this unfairness, pensions are still considered by many to be a minefield. Recent research showed that only one in 10 divorcees with a pension yet to be drawn had made an agreement for pension sharing. Separating couples are often not aware that a person’s pension is a marital asset which should be considered as part of any financial settlement or if they are aware, they (quite understandably) are focussed on their home and how they will meet their needs or those of their children following separation. Others seek to ignore pension assets altogether due to their complexities. However, pension assets are important, valuable assets (often the largest asset for a couple) which provide security in later life and should not be overlooked.
When a separating couple consider how to deal with pensions, they have two main options. The first is a pension sharing order and the second is pension offsetting.
A Pension Share
A Pension Share is where one person transfers a share of their pension to the other. Each person then has their own separate pension pot (which they can contribute to and invest as they wish) and they will subsequently not benefit from each other’s post-divorce pension contributions.
A pension can be shared based on either capital value or income that will be generated on retirement and consideration will need to be given to which is most appropriate in each case. The Pension Advisory Group have indicated a preference for ensuring that spouses have equal pension income in retirement in circumstances where the pension assets are significant and the parties are nearing retirement age. Conversely, it may be more appropriate to share the capital value of the pension in circumstances where the parties are young and the pension assets have less value.
Offsetting
It is not uncommon for a pension to be offset against another asset, whereby one person keeps a greater share of another asset, usually the family home, instead of receiving a share of the pension. This can be a good option in circumstances where the pension assets are minimal and the costs of implementing a pension share are disproportionate or where one person wants to keep the family home. Although this may seem like an attractive solution at first glance (and it may well be), it is not without its pitfalls and it is an option which must be carefully considered. There is a real risk of forgoing long-term security for short-term stability which, whilst solving an immediate problem, may cause greater issues and uncertainty in the future. Unfortunately, it is often the financially weaker party who loses out in these circumstances, as their primary focus is keeping their home rather than considering their long term prospects meaning they can be dismissive of the true value of a pension asset whilst also having less ability to rebuild a pension fund post divorce.
Valuing a Pension
Whether opting for a pension share or offsetting, the true value of the pension asset must be ascertained at the outset. The Case Equivalent (CE) value of a pension (which is the sum that pension providers would pay to discharge their obligations in respect of the pension) are not always accurate. A CE value is calculated in accordance with each scheme’s own rules and the actual value of pension benefits to a person may be very different.
In some circumstances, it may be appropriate to ring fence all or part of a pension when considering its value meaning all or part of a pension is excluded from the marital pot for the purpose of settlement. This may be the case for pensions that have accrued outside the period of marriage.
When offsetting a pension against another asset there cannot be a simple pound for pound exchange. A pension is a future income stream, whilst other assets (like a property or money in a bank account) are readily available. Further, pensions assets can have other benefits in addition to their monetary value, so it is difficult to compare their actual value against other assets and this can lead to some uncertainty.
Expert Advice
In light of the above complexities, expert advice is often needed to ascertain how a pension should be shared in the case of a pension sharing order and in order to avoid underselling the position in the case of a pension offset.
A PODE stands for Pension On Divorce Expert, which describes a range of experts who are experienced in working with pensions on divorce and includes both actuaries and financial planners. Separating parties must consider the most appropriate PODE to instruct in their individual circumstances. Each case will turn on its own facts, but The Pension Advisory Group have issued some helpful guidance on the use of such experts within divorce proceedings. Broadly speaking, advice from an actuary is likely to be preferable in circumstances where either party has a defined benefit (or ‘final salary’) pension, in particular a public sector scheme (the pensions of teachers, firefighters, NHS workers, the police and the armed forces all fall within this category). These pensions can be more complex as each scheme has its own set of rules and intricacies which mean that advice from an actuary is often required to help understand the true benefit/value of the pensions and how they may be shared. A key benefit to appointing an actuary is the regulatory and the professional standards that they are held to.
How can we help?
Pensions and how they should be dealt with upon separation are complex and require careful consideration. We can help explore your possible options in relation to pension assets as part of a financial settlement, whether expert advice is needed and how the family courts are likely to treat such assets.
Katy Louise Allen is a Senior Associate Solicitor & Mediator in our Tunbridge Wells office.
