Pensions and Divorce Settlements

What part will my pension play in my divorce proceedings?

When former couples are going through divorce proceedings the assets owned by the both of them will be examined when deciding how to divide up the assets between both parties.

When this process is taking place the court will be required to take the pension rights of both parties into account as these are viewed the same as any other asset will be.

Will I need to know the approximate value of my pension?

Each party to the divorce will need to know approximately what the values of their pensions are. Accordingly each individual will have to be in contact with their pension provider in order to be provided with a valuation of their individual pensions.

Can my former spouse get access to information concerning the value of my pension?

It is an important factor to be aware of that an individual’s former spouse does not have any right to know the value of their former spouse’s pension without them giving their consent for this information.

What are the options available for divorcing couples in relation to their pensions?

Through the court process a divorcing couple can decide to do the following with their pensions:

  • Balance the pension rights against another asset such as the matrimonial home – this process is known as Pension Offsetting

  • Arrange that when one party’s pension eventually comes into payment, a specific portion of it will be paid to the other party – this process is known as Pension Earmarking

  • Split the pension at the time of divorce to give both parties their own pension pot for the future – this process is known as Pension Sharing

Pension Offsetting

During the process of pension offsetting all of the assets owned by the couple will be taken into account with the pension benefits of an individual party being offset against other assets for example the matrimonial home.

The individual party will keep their own pension rights and the other party will be given the benefit of the other asset offset against the pension, for example the right to live in the matrimonial home.

What are the problems with using pension offsetting?

Often when pension offsetting is the desired process it can be difficult to fully achieve a fair balance of a couples total assets. One of the biggest problems when looking at pension offsetting is that the value of a pension may be far greater in value than the other assets.

Furthermore the value of a pension is more susceptible to fluctuation than other such values as property values meaning it is often difficult to fully achieve offsetting.

What happens if it is difficult to achieve offsetting?

If a couple cannot come to an agreement using pension offsetting due to the above problems it is likely that one of the other options for dealing with pensions in divorce will be used.

Pension Earmarking

Pension earmarking is provided for by the Pensions Act 1995 and deals with the process whereby the pension scheme will pay a specific amount of the individuals pension or a specified amount of the individuals pension lump sum to their ex spouse.

How much will this amount be?

The amount specified will depend upon the individual facts of the case taking into account the value of all of the assets of each individual and the value of the pension. The amount to be paid will be specified at the time of the divorce. However, following the divorce either party can apply to the court to have the amount varied.

When will this payment be made?

The payment will only be made when the party whose pension it is retires – i.e. they start to claim their pension. This amount would also be paid in the circumstance that the individual whose pension it is dies.

What is the process for this payment to be made?

The court will order the pension scheme to make this payment using their powers under the Pensions Act 1995.

What are the problems associated with pension earmarking?

The main problem associated with pension earmarking is that it does not enable the couple to achieve a clean break from each other. Furthermore the sum will only be paid when the spouse with the pension retires meaning that it will not be immediately forthcoming following the divorce.

Additionally if the Divorce Order provides for regular payments of a pension rather than a lump sum this will stop when one of the following events occurs:

  • The spouse with the pension dies

  • If the party receiving the earmarked pension remarries

What would happen to a lump sum payment if the former spouse remarries?

If a former spouse who is entitled to a lump sum payment under an earmarked pension remarries they will still be entitled to the payment of the lump sum when their former spouse retires.

Pension Sharing

The Court is provided with powers under the Welfare Reform and Pensions Act 1999 to split pension rights between the parties to a divorce.

How does this work in practice?

This works in practice by separating the ex-spouse’s benefit entitlement from the spouse who is a member of the pension scheme enabling the parties to have a clean break.

Pension Sharing Order

The Court will issue a pension sharing order which will create the parties to the agreement, for example the Pension Credit Member (the spouse entitled to the payment) and a Pension Debit Member (the spouse who is the member of the pension scheme).

How is the Pension Credit calculated?

The Pension Credit will be calculated according to the pension scheme member’s Cash Equivalent Transfer Value (CETV) and will be a percentage of this and not a fixed sum of money.

What is the CETV and when will this be calculated?

The Cash Equivalent Transfer Value is the amount that the pension would be worth if it was to be cash. This is calculated as of the day before the Pension Sharing Order takes effect meaning that it can be a higher or lower sum than was initially disclosed at the beginning of the divorce proceedings.

How should a decision be taken on how to deal with a pension during divorce proceedings?

As the three options for dealing with pensions carry both advantages and disadvantages it is imperative that all assets are looked at during the divorce proceedings and all available options are taken into consideration. Accordingly it is good practice to adhere to the following steps when making the decision:

  • Gather up all available documentation – look at your spouse’s documentation and take a full assessment of your own working career

  • Ask for expert advice from your solicitor

  • Act on this advice choosing the option which will most benefit you