Pensions on Divorce: You Asked, We Answered

What’s the best way to deal with a pension during a divorce?

The easiest and simplest route for most divorcing couples is the pension sharing order (PSO). A fair division is decided upon (with the assistance of a pension expert if necessary), then an order is sent from the court to the pension scheme mandating that a percentage (in theory, this is usually 50%) is paid to the pension holder’s former spouse. This can either be paid directly into an existing pension, or if the former spouse has no existing pension, this asset can be used to create one.

A pension sharing order can guarantee that both parties have an income in retirement, unlike pension offsetting (where one party gets an asset of equal value, such as a home). Yet at the same time, a pension sharing order allows the divorcing couple to make a clean break, unlike a pension attachment order.

The only times we would recommend using a different mechanism to divide a pension is when a pension sharing order is inapplicable or not cost effective. For example, if one partner has a foreign pension, then it is beyond the jurisdiction of British courts. In this case, pension offsetting would be the right solution. Or, if the couple divorcing is very young and the pension very small, it may be more cost effective to offset it than pursue a pension sharing order.

Will I have to go to court?

Unfortunately, if you want a pension sharing order or a pension attachment order, you will have to go to court. Pension offsetting does not require a court order, and so can be accomplished via other routes.

Although family court is unavoidable in these circumstances, it is not something you should worry about. Often these orders are made by consent, meaning that no-one has to set foot in a courtroom, and everything is done electronically. There is clear legislation and guidance in place concerning pensions in divorce, and your legal team will help to ensure everything runs smoothly.

Will I need a pension expert/actuary to help me figure out valuations?

The complexity of pension valuation is dependent on exactly what type of pension is under discussion. However, you can rest assured that we will enlist the expertise of pension experts and other finance professionals whenever it is necessary.

Legal professionals are not regulated to give financial advice. We will always seek appropriate counsel from pension experts because pensions are highly specialised financial products that are subject to regulation, which can have a variety of possible scheme rules and / or underlying assets held within them. We can also refer you to and/or work alongside your own financial advisors as required.

What role does a pension actuary/expert play in divorce proceedings?

A pension actuary can play an important role in divorce proceedings, especially when there are complicating factors. These experts are often instructed by parties involved in a divorce to help decide on what percentage of the pension should be transferred to a non-member spouse.

There are certain scenarios where it’s generally recommended that professional advice is sought regarding the division of pensions. These include situations where there are pensions with public sector defined benefit schemes, where couples have a significant age gap, where low value pensions have guarantees which mean they generate benefits as if they were higher value, and where a total combined pension pot exceeds £100,000.

It might also be appropriate to seek expert advice when a case is based on separating out non-matrimonial pension accrual and matrimonial pension accrual. This is basically where one party is trying to argue that what has been acquired before or after the marriage should be excluded from the settlement.

Will interest rates affect the division pensions in my divorce?

Rising interest rates can have a significant impact on the division of pensions in divorce proceedings. Over the last few years, the rise in interest rates has affected the value of cash current transfer valuations. This, in turn, can affect the value of how much pension is transferred.

There will also be a delay between the date of a pension report and the parties’ agreement of what a fair division should be. When this division is then implemented, the value of the pension can change. If there’s an agreement that a certain percentage should be divided between the parties, and the values of the pension change before that’s implemented, you can end up with slightly different results because of that change in interest rate.

What if my pension is tied to the family business?

If you or your spouse have a small, self-administered scheme (SSAS) where the pension is part of the family business, the assets in the pension fund will be valued as a whole to identify the value of the specific portion you hold as a member. It may seem quite complex, but when you break it down the percentage you hold in the family business pension scheme will be treated like any other pension and pension sharing or offsetting options can be explored. It is vital to seek advice from both legal professionals and financial advisers.

What if I’m already receiving my pension?

For older divorcing couples, one partner may already be past retirement age, and drawing their pension income. You can still make a sharing order, however the one receiving it might have to wait until they reach a specific age.

If the retired spouse is receiving the old basic State Pension or new State Pension, the other spouse may be entitled to a tax-free lump sum of any of the retired spouse’s private pension funds.

What if the divorcing spouse’s pension is overseas?

International divorces can be more complex because of the conflict of different legal jurisdictions. Enforcing a pension sharing order, or any other pension arrangement following a divorce or dissolution, requires a high level of legal expertise in the field.

A pension attachment order is generally considered by the court, as it is up to the overseas pension provider to implement a sharing order. However, the English courts have limited power over foreign jurisdiction, and may prefer directing the pension holder to transfer the pension to an English one. In cases where this is not an option, they will likely implement a pension offsetting arrangement against the value.

How do I protect my pension from my current (or former) spouse?

There are various steps you can take to protect your pension during divorce. Below are three of the most commonly used options. Something that you must bear in mind is that you should not, under any circumstances, attempt to hide your pension assets from your former spouse. It is a requirement to make a full and frank disclosure of all your assets during divorce, with the potential for serious consequences if you fail to do so.

Other topics that may be of interest…

Pre-nuptial & Post-nuptial Agreements

While this requires a degree of foresight, making a pre-nuptial agreement before you marry or a post-nuptial agreement after you marry can be an effective way to protect your pension in advance. Such an agreement can allow you to specify how your pension would be treated during a divorce, including that you would keep the entire pension pot and income.

There are strict rules for pre-nuptial and post-nuptial agreements, including that they must be fair to both parties and any children. It is therefore essential to seek specialist legal support to draft the agreement and to review it if you need to rely on it during divorce proceedings.

Pension Offsetting

As covered above, pension offsetting allows you to retain your whole pension or a greater proportion of it by letting your former spouse keep a larger share of other assets. This can therefore be a very effective option to protect a pension after divorce.

Clean Break Order

When getting divorced and making a financial settlement, something that is almost always advisable is to apply to a family court for a ‘clean break order’. This is a court order that legally severs the financial connection between you and your former spouse.

Something many people do not realise is that simply getting divorced or making a financial settlement does not end this connection. If you do not get a clean break order, your spouse could theoretically make a claim against your income and assets in future, including your pension. Securing a clean break order is, therefore, not something you can afford to overlook.

Your solicitor will be able to advise you on the process for securing a clean break order and make the necessary application. If you have agreed a divorce settlement amicably, this can be done alongside applying for the ‘consent order’, which is a court order that makes a voluntary agreement legally binding. If a court has made a ‘financial order’ deciding how your finances should be resolved, you can ask for a clean break order as part of this process.

GoodLaw Solicitors LLP: Get Expert Legal Advice

Please remember: the above is for informational purposes only and not a substitute for professional legal advice. For detailed advice and support tailored to your circumstances, contact our family law experts at 01273 956 270 or [email protected].uk