Pensions often represent the second-largest asset for most individuals, making them a significant factor in any divorce settlement.
Historical Legislation
The consideration of pension benefits within divorce settlements has been influenced by several key legislative changes:
- Matrimonial Causes Act 1973: Sections 23-25 encourage a ‘clean break’ where feasible.
- Pensions Act 1995 (PA): Mandates the consideration of pension rights during divorce asset assessment. This act introduced earmarking pension benefits and provided a foundation for cash equivalent transfer values (CETVs) to evaluate pension value in divorce cases.
- Welfare Reform and Pensions Act 1999: Introduced Pension Sharing On Divorce from December 2000, promoting a ‘clean break’ settlement for pension funds on divorce. Despite pension benefits still being considered in divorce settlements, a new option was introduced to allow splitting or sharing pension benefits between the parties at the time of the divorce.
Offsetting
Offsetting involves valuing pension funds, including them in the overall assets of the divorcing parties, and awarding one party a larger share of another asset (usually the family home) while leaving the pension untouched. This solution is ideal and straightforward, but it requires sufficient non-pension assets.
Attachment Order (Earmarking Order in Scotland)
An attachment order applies to all private pensions (including those in payment), excluding state benefits. The court issues an attachment order to the pension scheme, instructing the scheme’s trustees to pay a portion of the member’s benefits directly to the ex-spouse when the benefits are taken. Notably, if either party remarries, the earmarking lapses.
Pension Sharing
Pension sharing applies to all pensions except the state basic old-age pension and the new state pension. All pension benefits are valued, and the share can be granted by transferring from one scheme to another. The primary challenge with pension sharing is the associated cost. Schemes can charge for the calculations and administration involved in dividing the benefits.
Cash Equivalent Transfer Value (CETV)
A CETV represents the estimated cost of providing the member’s benefits within the scheme. For defined benefits, the CETV is a value determined on actuarial principles.
Summary
Pension sharing can be used in many divorce cases where offsetting isn’t possible. However, the cost will be a primary concern. The value of any transfers must justify the significant costs involved in calculating and arranging the new agreements.
Please remember, a pension is a long-term investment. The fund value may fluctuate and can decrease. Your eventual income may depend on the size of the fund at retirement, future interest rates, and tax legislation.