Planning for the future: Understanding pensions and divorce settlements
When a marriage ends, dividing assets can be challenging and one of the most confusing issues is how pensions will be treated. After years of working and paying into a fund which provides for the day you finally get to retire, couples can often see that fund reduced as part of the financial order on divorce. This guide, by Family Law specialist Sarah Thomas, explores how pensions are addressed during divorce and what options are available.
What happens to pensions during divorce?
So, what is the position with regard to pensions on divorce and what can the courts do with a pension when considering how to divide assets?
Since 1st December 2000, when considering finances on divorce, and December 2005, when considering finances on dissolution of civil partnership, the court have had the ability to make orders to share personal or occupational pension between spouses when dividing the assets.
Types of pension orders
Pension sharing orders – This is possibly the most common order made in relation to pensions in matrimonial proceedings. This is when a portion of one spouses pension fund is transferred into a separate pension fund for the other spouse. This order requires the court’s approval and ensures that both parties have independent pension entitlements. The transfer is stated as a percentage of the overall fund value, known as the transfer value.
Pension attachment orders – This is an order that provides for the pension provider to pay the non-member spouse a percentage of the pension income each month from the date of retirement. This therefore reduces the amount that the member receives by way of income. There is a lot more risk with this order and therefore it is rarely used as it is dependent on the pension fund remaining in payment. Payments cease if the member spouse passes away and the non-member spouse has no control over what happens to the pension, for example, they have no say in when the pension will be drawn down or what decisions are made in relation to the pension fund.
Pension offsetting – This is when the court does not make any order in relation to the pension and instead gives one party a greater share of the other assets i.e. capital to “offset” their entitlement to the other party’s pension. This can be particularly useful when the party looking to offset the pension entitlement needs immediate access to funds from the other assets to meet their needs.
Are pensions taken into consideration in every divorce or dissolution case?
Whilst disclosure of the value of the pensions will need to be provided in all cases, there are certain circumstances where the court may not make an order in relation to pensions. This will depend on the circumstances of each case and the needs of the parties but arguments can be raised that pension should be disregarded if for example:
- It is a short marriage.
- It is a small pension fund and the cost of implementing the pension will outweigh the benefits of sharing the pension.
- The pension has accrued since the date of separation.
- The pension accrued before the date of the marriage (although this will depend on the length of the marriage).
How do the courts decide what order should be made?
The first step when considering any financial order should be financial disclosure. This is when both parties provide details of all of their assets, liabilities, income and pension. A value of the pension can be obtained by contacting your pension company. Once this has been obtained from both parties, consideration can be given as to how pensions should be treated.
What happens next will depend on the size of pension being taken into consideration. If the pension is small, an agreement may be reached to disregard the pensions however, if the pensions are large it is recommended that professional advice is obtained from a pension actuary to determine how the pension should be shared to achieve what the parties are seeking.
Once an agreement has been reached or the court have made an order in the course of financial proceedings, a prescribed form must be completed and approved by the court before being sent to the pension company for implementation.
Do I have to go to court for an order to be made?
It is possible to resolve pension matters without going to court. If both parties agree terms this can be incorporated into a consent order and submitted for court approval. The court can then approve the order without the need for the parties to attend. The court may however request that the parties attend to ensure that they understand the full implications of the order. This is especially so if one party is unrepresented.
If no agreement is reached through negotiation or alternative dispute resolution then it may be necessary to request that the court make a decision on their behalf.
Implementing pension orders – what should I expect?
Depending on what type of order is made the pension company will then set to implement the order.
Pension sharing order: The pension provider has 4 months to implement the order raising a pension debit on the pension of one party and transferring it into the chosen pension fund of the other party. In some circumstances it is possible to leave the pension credit with the same pension company however this will depend on the pension scheme rules and whether they offer that opportunity. If not it is always advisable to seek independent financial advice from a pension expert as to what options are best for the person receiving the pension credit.
Pension attachment order: The receiving party will be notified shortly before the payments begin.
Can I continue to pay into my pension without there being a claim made against it?
If a pension sharing order has been made and implemented and any financial order contains a clean break provision then any future contributions will be protected and your spouse will not have a claim against them.
It is however important to note that until a court order is made either by consent or after intervention by the court your spouse can make a claim against the pension regardless of the period of time that has passed and therefore it is always a good idea to ensure that claim against pensions are dealt with at the time of separation.
What about my state pension? Can a claim be made against that?
Under the new single-tier state pension system, state pensions cannot be shared. However, if you reached the state pension age before April 2016, claims against the Second State Pension may be possible. Additionally, a spouse with incomplete National Insurance contributions may apply to be credited with contributions from their partner’s record. This can benefit those who took time off work to raise a family.
How can Butcher & Barlow assist?
The issue of pension can be a complex subject following the breakdown in the marriage and specialist legal advice as to how these should be dealt with is always recommended to ensure that both parties are dealt with fairly and that all parties receive what they are entitled to.
Contact Butcher & Barlow for tailored guidance and support in navigating your financial settlement.
Sarah can be contacted at sthomas@butcher-barlow.co.uk or on 01928 733871.
The information in this article was correct at the time of publication. The information is for general guidance only. Laws and regulations may change, and the applicability of legal principles can vary based on individual circumstances. Therefore, this content should not be construed as legal advice. We recommend that you consult with a qualified legal professional to obtain advice tailored to your specific situation. For personalised guidance, please contact us directly.