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.
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.
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.
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.
In pension-sharing, a proportion of the pension entitlements is transferred to the spouse who is not a member of the scheme. This spouse then has similar rights to the scheme member. The advantage is that neither spouse is dependent on the other to receive a pension, which will continue even after the original scheme member dies. The entitlement can usually be transferred to a stakeholder or personal pension plan and the pension paid any time after the age of fifty. However, pension-sharing can be expensive to set up. The scheme providers may charge for costs, including up to £1000 for administration.
You are worried that you might have to share your pension with your spouse on the breakdown of your marriage. Please note that the court can “attach” a spouse’s pension so that a capital lump sum and income for a spouse can be paid from the other spouse’s pension. In those circumstances, the pension remains as one fund. If a divorce was filed after 1st December 2000, pension sharing is available so that when a pension sharing order is made for a spouse from the other spouse’s pension, each will then have their own separate pension scheme, either in a completely new fund or as part of the original fund.
It is vital that you obtain specialist advice in this complex area.