Divorce and Your Pension

How do your pension rights get affected after a divorce?

Divorce and pensions is very important. After the worth of the previous matrimonial home the pension provision of one or both spouses may be the biggest investment asset of the marriage. Pensions and divorce is a question which has assumed greater and greater weight especially since the Pensions Act 1995 and the Welfare Reform and Pensions Act 1999.

The courts have long had the power to take pensions into account in separating up the matrimonial assets. Nonetheless, it is important to realise that there is no mechanical entitlement to pension sharing. People often seem to think that just because they have been married they are entitled to half of the whole thing, including the pension. That is not the case; divorce pension entitlement is more delicate than that.

In fact when a marriage breaks down the courts have to decide how to divide the matrimonial assets. They do so according to principles laid down by Parliament and, in particular, section 25 of the Matrimonial Causes Act 1973. There are four options to consider.

Open-ended Maintenance

In open-ended maintenance the ex-spouse who is a member of a pension scheme makes regular, index-linked payments to the other spouse. There is no need to divide the pension fund in this case. However, one spouse gets dependent on the other and may lose any rights to payments on remarrying. Also, payments cease when the ex-spouse who makes them dies.

Earmarking

In earmarking, the court hearing the divorce issues an ‘attachment order’, which obliges the pension scheme to pay a proportion of the fund directly to the spouse who is not a member. Earmarking is a way of moving forward if the spouse do not reach an out-of-court settlement. However, the spouse who has not contributed will have to wait for payments until the scheme member retires, and payments will cease when the scheme member dies.

Offsetting

Under offsetting the value of the pension fund at the date of divorce is worked out and added to the value of other assets, such as the family home. All these assets are taken into account when working out the compensation for the spouse without a pension scheme, as are each spouse’s needs – individually and to care for children. The benefit of offsetting is that it allows the couple to make a clean break – neither is financially dependent on the other. However, the disadvantage is that it only works fairly if the other assets are at least equivalent in value to the pension fund.

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