The Importance of Pensions on Divorce

When a marriage breaks down, one of the most difficult issues to resolve is the division of assets. One often overlooked but significant asset to consider is pensions.

The Pension Advisory Group have just published a second edition of their Guide to the Treatment of Pensions on Divorce, known as PAG2. The original version of the guide, released in 2019, has gone a long way to assisting family lawyers and family courts with information on the approaches available.

The updated guidance makes further clarification on the various pension sharing options available and factors to consider when deciding which option is suitable for a particular couple.

For those interested, shortly after this was released, we published an analysis of what the Treatment of Pensions has meant for the family court.

How Pensions Can Be Divided in Divorce

• Pension Sharing: You are given a percentage share of your spouse’s pension fund, transferred into your name.
• Pension Offsetting: The value of your share of the pension fund is offset against other assets, such as the family home.
• Pension Attachment: A percentage of your pension is set aside for your spouse to claim on retirement.

Whilst the State Pension is generally not shared between divorcing couples, there are complex rules around National Insurance contributions and protected payments.

Pensions are evaluated based on their Cash Equivalent Transfer Value (CETV or CEV), which indicates the fund’s cash worth. However, this figure often oversimplifies the true value of pension benefits. To accurately assess pension values, it’s advisable to consult a Pension on Divorce Expert (PODE) such as an actuary.

With pensions becoming an ever-more important asset, it is important to seek professional advice, particularly where significant assets are held in pension funds or the divorce is taking place in later life, where it is more likely that significant pension assets have been accrued.

To seek initial advice on any aspect of divorce, including pensions, please get in touch.

Further Information on Pensions and Divorce Settlements

Which Pensions Are Considered?

In divorce proceedings, all pensions must be declared in the financial disclosure process. This includes:

• Private pensions: Workplace or personal pensions that can be either defined contribution or defined benefit schemes.
• State Pension: While the basic State Pension cannot be split, some benefits such as the Additional State Pension or protected payments may be taken into account.
• Public sector pensions: Covering employees in the NHS, armed forces, teaching, police, and other public services. These are often valuable defined benefit schemes.
• Specialist pensions: Including SIPPs (Self-Invested Personal Pensions) and SSASs (Small Self-Administered Schemes) which allow more control over investments.
• Overseas pensions: Require careful valuation due to different national rules and regulations.

It’s crucial that no pensions are omitted from disclosure. Failure to declare an asset could result in a court revisiting the financial settlement.

Understanding the Main Pension Types

Defined Contribution Schemes

These are based on the contributions you and/or your employer make during your working life. The final retirement income depends on:

• Total contributions made
• Investment performance over time
• Length of time funds remain invested

These schemes have become the most common form of workplace pension in the UK. They can fluctuate in value depending on market conditions.

Defined Benefit Schemes

These pay a guaranteed income in retirement, usually based on your salary and length of service. They are sometimes referred to as ‘final salary’ or ‘career average’ schemes. Although they offer security, they are becoming less common due to the cost to employers.

State Pension

Paid by the government once you reach the official retirement age (currently 66). While it cannot be split in a divorce, certain circumstances may allow for adjustments based on National Insurance contribution history.

Specialist Pensions: SIPPs and SSASs

• SIPPs allow individuals to manage their own pension investments.
• SSASs are similar but usually set up for small groups, such as company directors or senior employees, and allow for greater investment flexibility.

Overseas Pensions

These can be more complex to value, often requiring local legal and financial expertise.

How Pensions Are Valued in Divorce

Valuing pensions accurately is one of the most technical parts of divorce proceedings.

• Cash Equivalent Transfer Value (CETV): This is the lump sum value that would be paid if a pension was transferred to another scheme. It is the standard figure provided by pension providers, but it does not always reflect the true long-term benefits.
• Defined Benefit Schemes: CETV may undervalue these because they provide guaranteed income. Expert actuarial reports are often essential.
• Defined Contribution Schemes: Valued more straightforwardly based on the current market value of the pension pot.
• Specialist Pensions: Such as SIPPs and SSASs, require valuation of all underlying investments, which can range from stocks to commercial property.
• Overseas Pensions: Must be assessed under the relevant jurisdiction’s rules, often involving cross-border specialists.

Accurate pension valuation is vital because even small differences in calculations can have a significant impact on the eventual financial settlement.

For more information around finances and divorce, check out our guide to financial arrangements during divorce.

Get Expert Legal Advice

Dividing pensions during divorce is a complex process with long-term consequences for your financial security. At GoodLaw Solicitors, we provide expert guidance to ensure your settlement is fair and your future is protected.

Call us today on 01273 956 270 or scroll down to complete our online contact form to speak to a divorce solicitor.