Pensions are often a highly significant part of someone’s finances. And when it comes to a divorce settlement, it’s commonly believed that pensions are left out of it – that pensions are personal assets rather than matrimonial ones. In a recent survey by the Money and Pensions Service, only 43% of adults surveyed knew that pensions could form part of a divorce settlement.
In many situations, a pension will form part of a divorce settlement. And in this article, we’ll look at when and how that happens.
Please also note that the information presented here will apply equally to and the process for dissolving them. This isn’t referred to specifically (to avoid a lot of very dense sentences) but if you are dissolving a civil partnership, you can swap out ‘divorce’ and ‘spouse’ with ‘dissolution’ and ‘civil partner’ respectively, and the information will hold true. Alternatively, please feel free to contact us if you would like to discuss your situation.
What happens to pensions on divorce?
During the financial disclosure part of the divorce process, each spouse will have to disclose any private pensions that they hold.
If a pension was built up during the marriage, it will be considered a matrimonial asset. This will often be the case with a long-lasting relationship, but there are situations where a pension may not be deemed a matrimonial asset. These include situations where:
- The marriage was short, and it would not be equitable (legally fair) to divide the pension
- The pension fund in question is small, and so may not be worth dividing
- The pension was accumulated after separation or before marriage
However, even if a pension may qualify for one of these exceptions, it must still be disclosed during financial disclosure.
Basic UK state pensions will not form part of the divorce settlement. However, an additional state pension or state pension credits may be shared and so should be disclosed.
Valuing pensions
Once the spouses’ pensions have been identified, the pension funds must be valued. For most pensions, this will be done using the Cash Equivalent Transfer Value (CETV). The CETV is the cash value of a fund quoted by the pension provider as if they had been instructed to transfer the benefits to another scheme.
However, this method may not always be suitable. For example, final salary or defined benefit pensions (which give a retirement income based on salary and duration of employment rather than the value of contributions made) could be undervalued using the CETV. In these circumstances, a valuation from a pensions expert may be required instead.
How might pensions be shared on divorce?
After the pensions are valued, the next step is to determine an ‘equalisation’ of the pension pots. As a starting point, the aim is usually to achieve a 50/50 split of the pension funds, especially in relation to long marriages. However, this may not always be the case, depending on the circumstances of the marriage.
There are 3 ways in which pension funds may be shared on divorce:
- Pension sharing order – This is the most commonly used method. It involves part of one spouse’s pension funds being transferred to the other spouse, either into that spouse’s existing pension(s) or into one newly created for the purpose.
- Pension attachment order – This ‘earmarks’ a portion of one spouse’s pension pot to be paid out to the other spouse. When the pension benefits are paid out to the pension-holder, that earmarked portion will go to the other spouse. This means it may be some time before the division between the spouses is actually made, and so it does not achieve a ‘clean break’ at the time of the divorce settlement.
There are also risks attached to this method. For example, if the pension-holder dies before the pension benefits become due, their ex-spouse will receive nothing, despite the division specified by the divorce settlement. As such, this method is only rarely used.
- Pension offsetting – In this method, the spouses’ pensions are left untouched. Instead, the spouse with the pension of lower value receives some other asset(s) to balance the difference in pension values.
Each of these methods will need to be approved by the court to be valid – either as part of an order made by the court itself or, more commonly, by a consent order made between the spouses and then approved.
The spouses can also agree the terms of a pension sharing agreement between themselves, although again, to be valid, this has to take the form of a consent order approved by the court.
If you need advice
At Bridge McFarland, we have a dedicated team of family law solicitors, with years of experience in helping people untangle the issues that can arise during divorce.
If you would like to discuss anything mentioned in this article, or you would like expert advice on your divorce, please just get in touch with us.
