In recent years, January has come to be unofficially known as ‘divorce month’ due to the number of couples looking to separate once the festive period is over and the new year arrives.
However the process can be a daunting prospect, as divorce brings with it a number of factors to be considered, and one of these that is commonly over looked is pensions.
According to a survey carried out by Which? in December 2021, just 15% of divorcing couples included pensions in their financial settlements.
The largest asset
Pensions are, usually, the biggest asset for divorcing couples, making up 42% of household wealth – according to the Office for National Statistics (ONS) – followed by property, which makes up 36%.
Therefore, the importance of discussing pensions as part of divorce proceedings is paramount to ensuring that neither party is left with a lower income.
Sections 25(2)(h) and 25B(1)(b) of the Matrimonial Causes Act 1973 (MCA 1973) requires the court to have regard to the benefits under a pension arrangement that, by reason of dissolution of annulment of the marriage, a party to the marriage will lose the chance of acquiring.
It is important to understand the full range of options available when dealing with pensions, and the implications involved. It is essential to understand the nature and value of pension rights, the ways in which the rights can be apportioned and the ensuing implications for the parties.
Where pension funds are a material part of the assets, consideration should be given to:
- The nature of the pension fund(s);
- The uses to which the pension fund(s) can be put;
- The manner in which the court’s powers can be used to fit the future needs of the parties; and,
- The appropriate use of experts – for example, independent financial advisers and/or pensions experts – to gather relevant information, interpret that information and consider the effect of the exercise of the court’s powers on the parties.
Often, parties may wish to equalise their retirement provision by sharing the available pension resources. A party may intend to draw a tax-free lump sum at retirement, which represents capital, and, usually, the rest of the pension fund will be accessed as deferred income. If a pension is already in payment, it can be treated as current income.
Unsurprisingly, every single case is different and there’s no one size fits all approach when it comes to dividing up assets.
Splitting the pension 50:50 will not necessarily produce equal pension income on retirement. This can be for a number of reasons, not least the respective ages and life expectancies of the parties, and the commercial reality of what the pension credit will buy the pension recipient in terms of income on retirement.
Another approach can be to provide the pension recipient with a percentage split that will equalise pension benefits on retirement.
In many divorce cases, an equal sharing of pension rights will not produce a fair result because of the parties’ needs, ages, length of the marriage or because the pension rights are non-matrimonial assets.
To that end, there are several different options available to separating couples when it comes to splitting pensions.
Pension offsetting is the process whereby the value of the pension resources is set against the value of other assets held between the parties. Offsetting does not involve the court making any pension orders. The pension rights remain with the pension member. It works by adjusting the distribution of non-pension assets to take into account that one party will have a less valuable pension provision.
It can often be used in cases when one party wishes to retain the family home at the expense of future pension provision. It is also an option where the pension rights cannot be shared, for example an overseas pension.
Pension sharing is the method by which an existing pension arrangement is split and divided between the parties following divorce, nullity or dissolution proceedings.
A pension sharing order transfers a part or the whole of a pension from one party to the other, giving the recipient a separate pension fund that can be invested in the same scheme, or in another external scheme, subject to the relevant scheme rules.
Pension attachment orders
A pension attachment order requires the person responsible for a pension arrangement to pay a percentage of the pension income, and/or pension commutable lump sum, and/or death benefits available to one party when a pension becomes payable to the other party. In this way, the recipient attaches to the existing pension arrangement.
When it comes to pensions and divorce there are numerous outcomes that need to be considered and it’s for this reason that it’s always advisable to consult a specialist family solicitor at the earliest opportunity to discuss these matters and ensure the best resolution for all involved parties.
About Layla Babadi
Layla is a Legal Director at Nelsons. She qualified as a solicitor in 2005 and joined the Family Law team in 2015.