Divorce and Pensions

Sep 26, 2023 | Pensions

Divorce and Pensions: A Guide to Sharing Fairly

Our paths don’t always follow a straight line. Divorce rates have been on the rise, and as a result, our legal systems have adapted to address the issue of dividing assets. It’s not just about splitting up physical assets, like the house or the car. There’s something equally important and one of the most significant and often overlooked is pensions.

The Starting Point

As the Welfare Reform & Pensions Act of 1999 ushered in a new era, it granted the courts the authority not only to split the physical assets of a couple but also their pension rights. Suddenly, pensions became a vital piece of the divorce puzzle.

Three Paths to Pensions in Divorce

  1. Pension Offsetting: This approach entails assigning a value to pension benefits at the date of divorce and then offsetting them against other assets, such as the matrimonial home. While this option provides a clean break, it can be a bit tricky to make it completely fair due to the fluctuating nature of pension values.
  2. Pension Attachment Order: Also known as ‘earmarking,’ this method allows pension scheme trustees, under court instruction, to pay a percentage of the member’s future pension entitlement to the ex-spouse. While it grants flexibility for variation, it does not offer a clean break, and payments are only made when the pension holder chooses to retire, which could be delayed.
  3. Pension Sharing: The most revolutionary option introduced by the Welfare Reform & Pensions Act 1999, this method involves splitting pension rights between spouses. It creates two distinct entitlements: a pension credit member (the ex-spouse) and a pension debit member (the member). The pension credit is a percentage of the member’s cash equivalent transfer value (CETV), ensuring a fair and clean break between the couple.

The Clean Break: Benefits of Pension Sharing

Pension sharing stands out as the most effective way to ensure fairness and a clean break during a divorce. Key advantages include:

  • Fairness: Both parties receive a clear and fair share of the pension rights, based on a percentage of the CETV.
  • Clean Break: A divorce involving pension sharing results in a clean break, providing financial independence for both spouses.
  • Flexibility: The pension credit can be transferred to a provider of the ex-spouse’s choice, ensuring control over their financial future.
  • Preserved Pension Benefits: Pension credit members are entitled to any normal increases awarded to scheme members with preserved pensions.

Important Considerations

It’s crucial to understand the nuances and potential risks associated with pension sharing during a divorce:

  • Pension Types: Courts can issue orders for various pension schemes, including occupational pension schemes, personal pension schemes, retirement annuity contracts (RACs), and Section 32 buyout plans.
  • Disclosure: Spouses have a right to request current valuations of each pension pot, but consent is required to access this information.
  • Exclusions: Certain pension arrangements, such as state benefits and equivalent pension benefits earned between 1961 and 1975, may be excluded from legislation.
  • Charges: Schemes may charge for handling pension sharing administration, and clients should be made aware of these costs.
  • Risk Assessment: Transferring from a final salary or career average scheme to a money purchase scheme carries risks, and individuals should carefully assess their options.

Handling pensions in divorce might seem like a puzzle. But with these straightforward options, you can move forward confidently, ensuring fairness and security for both of you. Remember, a clear path to financial stability is possible, even when life takes a different route.

This communication is for informational purposes only based on our understanding of current legislation and practices which are subject to change and are not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.

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