Pension sharing in divorce proceedings
Client’s often hit a stumbling block when it comes to thinking about pensions as part of the negotiations in how to separate and divide matrimonial assets and then turn to us at Watson Thomas for advice. We have offices in Fleet, Hampshire and Guildford, Surrey.
Pensions, put simply, are an asset which can only be accessed once retirement age is reached. Often a tax-free lump sum can be taken immediately upon retirement and then the remainder of the pension is paid to you as an income stream until death. The amount of tax-free lump sum that can be taken and the amount paid by way of monthly income depends upon the value of your ‘pension pot’, this value is officially known as a Cash Equivalent Transfer Value (CETV) or Cash Equivalent Value (CEV).
In divorce proceedings it is important to value all pensions, this includes pensions which have been left dormant without contribution for a number of years, active pensions and state pensions. It is imperative that up to date values of both parties’ pensions are obtained and compared. A pension can change significantly in value from one year to the next and therefore we must ensure that we are considering current documentation at all times.
If one spouse has a more valuable ‘pension pot’ than the other, the spouse with the lower valued pension may be entitled to a Pension Sharing Order.
Pension Sharing Order
A Pension Sharing Order takes an agreed amount of money from one spouse’s pension and places it into a pension belonging to the other spouse. The amount of money to be taken is agreed as a percentage of the paying spouse’s pension CETV.
The calculation as to what pension share is fair and reasonable can be quite complex and depends upon what the parties to the marriage are looking to achieve. Often pension sharing orders are intended to provide for:-
- Equal ‘pension pot’ values for the Husband and the Wife at the point of separation;
- Equal incomes for the Husband and the Wife upon them both reaching retirement age;
- Equal ‘pension pot’ values for the Husband and the Wife relating to the period of their marriage only, rather than the entire length of time that the pension has been in existence.
This is however not an exhaustive list and the pension sharing order required in each individual set of circumstances will vary depending upon what the parties are hoping to achieve.
A pension sharing order can also provide for a share of the lump sum payment in addition to or instead of a share in the remaining pension which will be paid as monthly income.
Pensions are not straight forward assets as they can provide different rights for men compared to women and can change again when parties are of differing age, some pensions are based upon the person’s final salary and some have strict rules about how they can be dealt with and shared. It is often the case therefore that expert pension advice will be required to ensure that both parties receive the appropriate share in the pension in question.
In contrast however, when there are relatively straight forward pensions within a marriage and the parties agree that pension CETVs are simply to be divided equally, this is a calculation that we as lawyers can undertake for you.
Off-Setting Against the Value of Other Assets
Another option when considering how to deal with pensions is for one party’s interest in the other’s pension to be ‘off-set’ against the value of other assets. This is often a suitable arrangement whereby the pension values in dispute are not significant. In this situation it may be agreed that there will be no pension sharing order and instead the disadvantaged spouse would retain more of another asset, such as a larger share in the family savings for example.
At Watson Thomas we will fully consider both yours and your spouse’s pension documents to ensure that each particular pension is understood and we will advise you how best to deal with it moving forward. We will also arrange for you to receive expert financial advice from independent specialists when necessary.
If you have any queries regarding pensions or another aspect of family law please contact us to arrange a free, no obligation consultation or complete the enquiry form on our website and we will get in touch with you to arrange an appointment.