Pensions on divorce

When a relationship sadly breaks down, the primary concern for both parties will be the issue of where they (and any children) will live and how they will afford their daily living expenses. During such a challenging and emotional time, it is common for one of the couple’s largest assets to be overlooked – their respective pensions. It is important to remember that a pension could well be a couple’s most valuable asset, with the potential to vastly impact the outcome of a financial settlement. However, their exact value can often be tricky to calculate, which is why it is best to get an expert involved.

In this blog, we take a look at a recent case which demonstrates the significant impact pensions can have on divorce proceedings.

W v H [2020] – a case study

A recent case demonstrates the Court’s process of considering pensions and their value. The couple in question had been married for 17 years and had three children together, all of whom were currently living with the wife. They had £240,000 of equity in their former marital home, but by far the most significant asset was the husband’s £2m pension pot – 58% of which he claimed should be exempt from the financial settlement on account of his having made contributions prior to the marriage (i.e. a pre-marital asset). His former spouse wanted to keep the family home, and suggested offsetting her pension entitlement to secure the property.

Capital equality or income equality?

The Court took into consideration a number of factors when considering the allocation of assets in the financial settlement. This included a consideration of whether ‘capital equity’ or ‘income equity’ would be fairest in this couple’s circumstances. Capital equity, as the name implies, means that the couple’s capital is totalled up and divided in half. Income equity instead looks to equalise the income both parties would take from the pension upon retirement.

The result depended on whether the Court felt that capital equity or income equity would be fairest. It was established that capital equity might be fairer under certain circumstances, for example if the value of the pension is a smaller percentage of a couple’s assets, or if a couple is young and their anticipated income is not reliable. The negative side of capital equity is it may be unfair if the pension pot was of significant value in proportion to the couple’s total assets, and if both parties depended on the pension income to meet their respective needs.

Should pre-marital contributions be ringfenced?

While the husband in this case sought to exclude a percentage of his pension by claiming it was a pre-marital asset, the Court felt the decision should be led by each party’s ‘needs’. Therefore, it was difficult to argue for the exclusion of part of the pension when the needs of the other spouse would not be met were it not included.

The Court was also concerned that the wife’s proposal of offsetting the pension against the family home could result in unfairness in the long term; the couple was therefore advised to instruct an actuary and give them the time they needed to prepare a full report and valuation.

Court orders

When deciding on the allocation of pension assets, a Court may choose from a range of orders depending on the couple’s individual circumstances. The first of these is a pension sharing order, according to which one party will be allotted a percentage of their spouse’s pension. This sum of money will then be credited to their own pension fund. This was the type of order handed down in the W v H case.

Another option is a pension attachment order, which works a little differently by directing part, or all, of a pension to the other party once it has come into payment. The Court will usually order the pension scheme administrator or provider to make these payments directly to the receiving spouse.

Lastly, a Court may select a pension offsetting order, according to which one spouse is ordered to transfer a higher share of the capital assets available in exchange for keeping their pension fund intact. Each party will keep their own pensions, and the party with a smaller pension can receive other assets to balance out the difference.

This final type of order provides a clean break, as it allows you to allocate assets of the same or similar value to your ex-spouse or civil partner, and your pension remains with you.

Full disclosure

It is important to remember that, prior to any financial negotiations, each party must fully disclose all of the pensions they hold. An individual may have numerous pension schemes to their name – including private pension schemes, work-based pensions, and any Additional State Pension. Both spouses should carefully go through their employment history and check if there are any pension schemes that may have been overlooked.

Surprisingly, it is easy for pension schemes to be ‘lost’ or forgotten about, as communication from pension providers can be infrequent (and may not be received at all if you have moved home and not notified the provider of your new address). It can help to work through your employment positions (and that of your spouse) in chronological order to ensure that no schemes have been inadvertently missed. What you may remember as a small and inconsequential scheme could potentially be much more valuable than you think.

Each pension scheme will be ascribed a ‘cash equivalent transfer value’ or CEV, i.e. a cash value placed upon the pension benefits within a particular scheme; this will likely need to be requested from the pension provider for the purposes of divorce proceedings. The request can often take up to a month or more to receive, so it is important to request this in the first instance so as not to delay proceedings.

Family law specialists can help

As we have seen, it is imperative to make pensions a significant priority during the divorce process, so the implications of any settlement can be explained and considered and neither party finds themselves at a loss when they reach retirement.

Just as each divorcing couple is unique, so the financial settlement will be tailored to your individual circumstances. That’s why our expert Family Law team is on hand to ensure the financial settlement fully meets your needs, both now and when you retire. To get in touch, please email family@attwaters.co.uk or call us on 0330 221 8855