By Jim Richards, Senior Associate at Winckworth Sherwood
At the best of times, most people struggle to understand their pensions, let alone when they are faced with the range of issues which a relationship breakdown can generate. It is perhaps unsurprising therefore that when it comes to divorce, considering how best to tackle pensions can be an added layer of stress, which is perhaps why pension sharing orders are relatively uncommon.
Broadly speaking, a pension is simply a way in which money can be saved and invested to provide an income in the future. But often, mistakenly, people take the view that the fund value is exactly the same as cash in the bank, or in a house. A pension fund, a current account and a house may have the same “value” but in reality, they are very different assets. This can cause problems when approaching solutions and considering options.
So, what can happen to pensions when a couple divorce?
There are three main options: each party keeps their own fund; the pension fund(s) between the parties are shared; or a spousal pension claim is “offset” for a greater share in another asset, such as the family home or savings.
Offsetting involves balancing the value of a pension against other assets which people would be entitled to share. This may seem attractive to meet short term needs (property) but risks losing out against long term needs (income in retirement). You may end up with a large mortgage, a house to live in, but no income in retirement with which to meet your needs. If you do this without seeking expert advice, you risk giving away a valuable pension claim because the pension valuation figure may understate the true value of the benefits of the fund.
Pension sharing is the method by which one party’s pension is shared with the other. In every case, this will result in a separate fund, perhaps within the existing scheme or separately in a new pension, created in favour of the receiving party. This can be particularly beneficial where one party took a career break to raise children.
If the parties are of a similar age and the value of the pensions broadly equal, it may be appropriate for there to be no pension sharing order. Most pension sharing arrangements are subject to charges from the pension provider, so it is only worth incurring these fees if absolutely necessary.
If the pensions are of relatively low value, it may be that there is no justification in sharing an asset which is unlikely to change either party’s financial position post-divorce. This could be the case if the parties are young and/or haven’t made any significant pension contributions.
In cases where pensions are valuable or the chosen option is to offset, you must get expert advice from a pension on divorce expert (PODE). A PODE can make recommendations in terms of how to divide the existing funds, by considering the actual benefits of each fund.
If your spouse is a member of a uniformed organisation (anything from the police to the armed services) it is vital that a report is obtained: the fund value of these pensions is a figure based on assumptions made by that scheme and so comparing this figure to other pensions, which will use a different set of assumptions let alone other classes of assets, is extremely risky. It also means that the benefits under two schemes with the same value may be very different: the same fund value will produce very different outcomes in terms of the actual pension paid on retirement. The 2019 Pension Advisory Report provides worked examples and further detail on these issues. The point is to be aware and to get an expert to consider the actual schemes you are dealing with.
Equally, if you wish to offset your pension claim against other assets, whether in whole or part, it is vital to get an accurate sense of what the pension is worth – a lawyer is not qualified to make this calculation. Failing to do this is likely to produce a result which is unfair to one or both parties. Whether an expert’s report is used or not, the final agreement between the parties will set out who is to receive what share, if any, of which pension funds. You will then become a beneficiary of a separate fund in your own name. The method by which you obtain the benefits under the pension will vary depending on the scheme in question. Once you have agreed a pension sharing order, it may also be essential to obtain financial advice in terms of the implementation and investment of the new fund, if the order creates a transfer to a new external pension provider.
That being said, this combination of legal, financial and expert advice whilst essential is relatively easy to obtain if you deal with an experienced family lawyer who will have access to various professionals working in this field.