Divorce and Pensions Help

If you are divorcing or have already got divorced then you may or may not be aware that pension benefits either built up by you or your ex-spouse can form part of the divorce settlement. 

Up until December 2000, there were two ways in which pension benefits were used in divorce negotiations that is in a "clean break" arrangement or "set off" or by an "earmarking order".

With effect 1 December 2000, The Welfare Reform and Pensions Act 1999 made provision for a third option, pensions sharing on divorce.

Clean Break / Set Off - is where, as part of the divorce negotiation, the value of the pension fund accrued is set off against other assets within the marriage e.g.  the husband keeps the contents of the former matrimonial home and the wife retains her pension benefits.  Thus providing a clean break.

Earmarking - this is where agreement had not been reached by the two parties and the case has gone to court for settlement.  It is then within the courts powers to issue an order for part of an accrued pension benefit to be earmarked for the other party.

Pensions Sharing - came into effect on for divorce proceedings on or after 1 December 2000.   It gives the power for courts to issue an order to share / split part or all of the accrued pension benefits.  There are effectively two pensions, one in each party's name.

Having part of your pension fund taken away or indeed acquiring new pension rights can present problems in themselves for individuals. 

If you have lost benefits, how can you make up the shortfall?  What are the rules?

If you gain a share in a pension fund, how and where will you invest it?  Can you leave it where it is?

2.  Pension Sharing on Divorce

The United Kingdom has one of the highest divorce rates in Europe with around 200,000 divorces each year.  If you have never been through divorce yourself, you no doubt know someone that has.  

Financial settlements on divorce can be complex and very painful.  In addition to thinking about the children, property, mortgage and wealth needs of today you must also think about your own future needs i.e.  retirement.  Pensions are usually one of the biggest assets built up within a marriage yet they are complex and their value misunderstood.  To help, there have been various changes in law to help divorcing couples to ensure there is an opportunity to look after you financially in later life.  

As well as legal advice, getting good pension advice is a necessity.  The three main options for consideration for pensions on divorce are offsetting, earmarking and pension sharing.

Option 1 - Offsetting

Offsetting is when the value of pension assets are calculated and set against the value of other marital assets.  Take a look at the following example for a separating couple:

• Joint assets - House equity £86,000, House contents £14,000, 1st car value £8,000, 2nd car value £4,000.  Total Joint Assets £112,000
• Other Assets - First person has a pension cash equivalent value of £20,000, Second person has a pension cash equivalent value of £124,000
• Possible Offsetting Solution:
• First person retains: The house equity £86,000, house contents £14,000, car £8,000, pension £20,000.  Total asset value = £128,000
• Second person retains: A car £4,000, pension £124,000.  Total asset value = £128,000

Option 2 - Earmarking

Earmarking is the process of reserving a pension benefit for someone else.  Available in England and Wales after 1 July 1996 and 19 August 1996 for Scotland.

Earmarking gives courts the power to issue an order to reserve pension benefits accrued by one party for the benefit of another.  This is done by issuing and serving an order on the trustees of the pension scheme.  

The court can issue an earmarking order to convert all or part of the pensions benefits into a cash sum or income or both and paid over to the former spouse but only on retirement of the original member.  In addition, company life insurance benefits can be assigned to the former spouse.  

Quite simply, the pension stays where it is and part or all of a benefit is reserved for the benefit of another to be paid at the retirement date.

Earmarking Unpopular: Earmarking is not popular because you can never be sure when your ex-partner will retire and you receive your share.  In addition, payments stop when the original pension member dies which could leave you with an income shortfall.

Option 3 - Pension Sharing

Pension sharing was introduced by the Welfare Reform and Pensions Act (1999) and is available for all divorce proceedings that started on or after 1 December, 2000.  Pension sharing starts with pension benefits that have been accrued being valued, known as a cash equivalent transfer value.  The whole or a share of the value is then divided by percentage into two pension funds for the divorcing parties.  You each have you own pension fund.  For some schemes, particularly where schemes are unfunded i.e.  there is no money in the scheme, such as public sector pensions, it may be that the ex-spouse becomes a member of the scheme in their own right.

For funded schemes, where there is money in the scheme, the you are allowed to transfer your agreed percentage of the fund to a new pension scheme chosen by you .i.e.  you transfer it to your own scheme.

Professional Pension Sharing Advice

After offsetting, pension sharing orders to transfer pension rights into your own name are exceptionally popular.  However, trying to value the pension today and its real long term value by second guessing future inflation and the impact on other state benefits is clearly difficult.  Pension values, in particular salary related defined pension benefits are much more valuable than many people think.

Transfer values are often in the tens and hundreds of thousands of pounds.  You should never ignore your ex-spouse’s pension for the sake of keeping the car or a little extra cash from the equity within the home.  I have a saying: “you can only ‘con’ a greedy person”; and a little extra cash today may be nowhere near as valuable as the shared pension rights of tomorrow.

Contact us if you need an opinion on your pension sharing rights or take a look at a new website we have written on the subject www.divorceandpensions.com.