What happens to pensions on divorce?
What happens to pensions on divorce?
It is a common scenario that on divorce one party will have significant pension provision, and the other party will have little or none. Clearly, this may be a relevant factor in any divorce settlement, but how exactly are pensions dealt with on divorce?
There are several options open to the court when dealing with pensions on divorce, but before we get to them, we must first ask a question.
Are pensions actually relevant?
Just because one or both of the parties has some pension provision does not necessarily mean that pensions will be relevant to the divorce settlement.
There are several reasons why this may be so.
It might simply be that the pension provision is too small to be taken into account.
Or it might be that the marriage was so short that the court considers that it would not be reasonable for either party to make a financial claim against the other.
But perhaps the most common situation in which pensions do not affect the settlement is where the party with the pension accumulated it either before the marriage or after the parties separated. In such a situation it is arguable that the pension is not a ‘matrimonial asset’, as it was not accumulated during the marriage. However, this is not an argument that will always work, as the court can still take the pension into account, if the needs of the spouse who doesn’t have the pension require it.
In most cases, though, pensions will be relevant. What, then, can the court do? There are essentially three options.
Pension attachment orders
The first option is to make what is known as a ‘pension attachment order’.
A pension attachment order is an order requiring the trustees of the pension to pay part of the pension payments to the other spouse, once the pension is in payment. It effectively amounts to a maintenance payment.
Pension attachment orders are actually quite rare. There are certain problems with them, in particular because the other spouse has no control over what further contributions the pension-owning spouse makes, or when the pension is taken by the owning spouse.
The second option is what is known as an ‘offsetting arrangement’. This essentially means that the party who has the pension will keep it, but the other party will be compensated by having a greater share of other assets.
Obviously, such an arrangement can only happen if there are other assets of sufficient value (the pension is often one of the most valuable assets of the marriage, often second only to the former matrimonial home).
There are also other issues with offsetting, in particular because you are not comparing ‘like for like’ assets.
Pension sharing orders
Lastly, the court can make a pension sharing order. This is the most commonly used option.
A pension sharing order requires that a proportion of the pension fund be transferred into a pension fund belonging to the other spouse. Note that the other spouse does not actually receive the money – it goes directly into their pension.
Pension sharing orders are often made with the intention of equalising the pension provision of both parties.
Valuing the pension
Both offsetting and pension sharing require that the pension be valued (in fact, the court will always want a valuation of any pension).
There are different ways of valuing a pension, but the most common method is by ascertaining the ‘Cash Equivalent Transfer Value, or CETV, which can be obtained from the pension provider.
Sometimes, however, the CETV can give in an ‘undervaluation’, especially with public service pensions, such as for members of the police force, in which case an expert valuation may be required.
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Obviously, the above is just a brief and simplified introduction to pensions on divorce. Dealing with pensions on divorce can be a complex issue, requiring expert legal and financial advice. We can provide you with the legal advice, and can put you in touch with a financial adviser, if you do not have one already.
To find out more, and to get started with one of our specialist lawyers, click here.