When couples go through a divorce or civil partnership dissolution, it is not uncommon for pensions to be undervalued or overlooked during the financial settlement process. However, it is crucial to understand that pension funds are an asset just like a property or savings in a bank.
Often, pension funds are not of equal value between separating spouses, either due to one party earning more than the other or if one parent has taken a step back in their career to raise the children. Therefore, couples should not ignore the importance of pension assets within the financial settlement to ensure both parties are fairly provided for in retirement.
There are various options as to how a pension may be used in a financial settlement, some of which include:
Pension Sharing Order
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
If a pension holder wishes to keep their pension fund in full, it can be offset 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, this option can enable a clean break. However, this might not be suitable if there are limited liquid assets.
Pension Attachment (formerly ‘earmarking’)
A pension attachment means that an agreed lump sum or a percentage of the pension is set aside for the ex-spouse to claim at the time of the pension holder’s retirement based on the fund’s value at that time. Pension Attachments can be a less favourable option as, unlike a pension sharing order or pension offsetting, it doesn’t achieve a clean break. The receiving spouse has no control over when their former partner decides to draw their pension or the value, and both parties are left with a degree of uncertainty. The receiving spouse can also lose attachment benefits if they remarry, or if the member spouse dies.
State Pensions on divorce
State pensions are one of the most frequently ignored assets, but these must be considered correctly when implementing financial settlement agreements. Whilst the Basic State Pension cannot be shared, the Additional State Pension can, and various options may be available to separating couples.
How do you value a pension?
Typically, when negotiating the division of pension assets, both parties will 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.
Depending on the value, the number of different pension funds to consider and the type of scheme, often, an expert pension actuary is instructed to prepare calculations as to the appropriate pension sharing options.
Financial Settlement Legal Advice
Whilst you may feel that your separation is amicable, issues concerning financial settlements are not always straightforward and involve a complex area of law, especially when pensions are involved. We strongly recommend that you seek specialist legal advice from our experienced divorce lawyers to ensure you fully understand your legal rights and that your options are appropriately reviewed.
For further advice on divorce and other aspects of family law, don’t hesitate to contact our Family Law team today.
This blog post is not intended to be taken as advice or acted upon. If you are seeking legal advice, please contact our team of solicitors
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