After the family home, a pension can be a couple’s most valuable asset. However, they can be overlooked or undervalued in a divorce.
As far as the law is concerned work, personal and additional state pensions (not the basic state pension) are all marital assets – regardless of which spouse’s name they are in.
It is notoriously difficult to value pensions and a great number of settlements between divorcing couples take place on the basis of pension values which are inaccurate in some way. So, how do separating couples go about gaining an accurate valuation and ascertaining how to fairly split the funds?
Gaining a valuation
Work pension schemes
If you have a ‘defined contribution’ pension, into which you make regular payments, in the first instance you can find the ‘transfer value’ (the figure that is used for a valuation) on your latest annual statement. This gives you a notional ‘value’ of how much the pension is worth at that date.
If you have a final salary or other salary-related pension scheme, the value will depend on both your salary and your accrual rate, and perhaps other factors such as date of joining
Personal pension schemes
If you have a personal pension plan you can ask your provider for a statement showing your pension’s ‘transfer value’, this is the amount you would get if you were to move your pension elsewhere and it is the figure that is used for valuation purposes.
However, valuations of a pension of any kind are not straightforward and we often decide to instruct a Pensions Actuary to help with the valuations. Sometimes initial transfer values can be very misleading and it is essential to consider the detail of the pension so as to ensure that everyone fully understands the benefits involved.
Additional state pension
The additional state pension is the extra money received on top of the basic state pension and is based on National Insurance Contributions. It can be split between spouses once the named claimant reaches pensionable age. At present, a man can start to claim his state pension from the age of 65 and a woman from 61 and nine months. However, by 2018 it will be 65 for women as well as men, and will continue increasing for both to 66 in 2020.
The options for splitting pensions
There are three ways that pensions can be divided during divorce or civil partnership dissolution. You can choose to:
have a percentage share of your spouse’s pension/s transferred into your own name,
offset the value of any pensions against other assets, such as a greater share of the family home, or
receive a lump sum or agreed income once the pension starts being paid (known as ‘earmarking’).
If your spouse is already in receipt of their pension, you may be entitled to a maintenance order in your favour for a share of the pension as it is being paid.
If you can come to an agreement between yourselves about how to split any pensions and the amount to be shared, this can be made legally binding via a court order (providing it is deemed to be fair).
If you are unable to come to an agreement, you must apply for a ‘financial order’ to let the court decide on your behalf. This process is separate from the divorce, may involve a number of court hearings and could take between six to 12 months.
How the court decides the percentage split of any pensions
The value of any pensions will form part of the total marital assets ‘pot’. The court will decide how this will be divided according to multiple factors, such as age and the ability to earn in the future, putting the needs of any dependent children above all else. It is also important to bear in mind the period of time over which the pension accrued; whether it was accrued during the marriage or before can make a big difference to entitlement.
Negotiations might result in one spouse taking the family home and the other keeping full entitlement to their pension. This method of offsetting a pension against other assets is a common way of dealing with divorce pension entitlement and can be a pragmatic and practical solution.
It is important to note that where a spouse has not worked because they are/were the principal carer for children and they do not have a pension of their own, the court will endeavour to ensure fair provisions are made.
This article is intended as an easy to understand introduction to some aspects of divorce, free of legal jargon. However, divorce is a complex, and unfortunately sometimes non-intuitive area of law. Please contact us for more specific advice about your individual circumstances and the legal processes which apply.
Contact Jane McDonagh