Despite their potential value, pensions are commonly overlooked during the financial settlement process when couples go through a divorce or civil partnership dissolution. However, pension funds can be extremely valuable and are assets, just like property, shares, or savings in bank accounts, and should not be dismissed or undervalued.
It is not uncommon for couples to have unequal pension fund values, either to one party earning more than the other or if one parent has taken a break from their career to raise the children. Therefore, to ensure that both parties are fairly provided for in retirement, separating couples should not dismiss the potential value of pensions within the financial settlement.
When including pensions in a financial settlement, there are various options available, some of which include:
Pension Sharing Order
A Pension sharing order (PSO) is a formal agreement to divide your pension assets at the time of divorce and has been available since December 2000. Divorcing couples can agree that a percentage of one spouse’s pension funds are transferred into a pension fund in the other spouse’s name. Effectively this achieves a clean break and allows both parties to independently build up their pension funds once the original pension sharing order has been finalised.
Pension offsetting is when the total value of any pensions is offset against other assets of the same or similar value. Offsetting allows a pension holder to keep their pension fund in full by giving the other spouse a larger share of any remaining assets, such as the equity in a shared property or their total cash savings. Like a pension sharing order, it provides a clean break between all parties, although it may not be a suitable option if liquid assets are limited.
Pension Attachment (formerly ‘earmarking’)
A pension attachment or earmarking order redirects an agreed lump sum or percentage of the member’s pension benefits to the ex-spouse or civil partner at the payment date. Pension Attachments can be a less favourable option as, unlike a pension sharing order or pension offsetting, it doesn’t achieve a clean break, and an ongoing link with your ex-spouse or civil partner will remain. Furthermore, the receiving party has no control over when their former spouse or civil partner decides to draw their pension or the value, and both sides are left with a degree of uncertainty. Pension attachment benefits can be lost if the member spouse dies, or the receiving party remarries.
State Pensions on divorce
Whilst the Basic State Pension cannot be shared, the Additional State Pension can, and various options may be available to separating couples. State pensions are often not reviewed correctly or overlooked but should be considered when implementing financial settlement agreements.
How do you value a pension?
Before negotiating the division of pension assets, both parties will likely need to exchange up to date financial disclosure and obtain a Cash Equivalent Transfer Value (CETV) in respect of any and all pension schemes held in their names. Usually, an expert pension actuary is instructed to prepare calculations as to the appropriate pension sharing options, but this depends on the number of different pension funds to consider and the type of pension schemes..
Specialist Financial Settlement Legal Advice
If you are looking for financial settlement advice or have questions regarding points raised in this article, our specialist family law solicitors in Portsmouth and Waterlooville can help. We have the knowledge and experience to help you and your family regardless of the complexity of your situation. We will explain all the options available to you and ensure you are aware of the costs involved, guiding, and supporting you through every step of the process.
Remember, you can talk to us in complete confidence and gain reassurance from speaking to someone who understands your situation.
Please note that this article is not intended as legal or professional advice. This is a general news article only and updates to the law may have changed since it was published.