Often within the divorce process priority is given to the immediate issues of where both parties will live and how they will fund their day to day expenditure from the income that is available. Whilst these are undoubtedly important and pressing issues, all too often the importance of pensions can be overlooked. This is despite the fact that pensions are often the most valuable assets available.
Further, pensions are complex and there are many misunderstandings surrounding how they should be treated on divorce.
It is important to make sure that pensions are properly considered within the divorce process from the outset and the implications of any settlement properly understood to ensure that neither party is left in an unfair or even vulnerable position upon retirement.
What types of order can be made in relation to pensions?
It is useful to be aware of the types of order than can be made in respect of pensions within a financial settlement upon divorce:
- Pension sharing: this provides one party with a specific percentage of the other’s pension that then becomes theirs (and that they are free to manage as they wish);
- Pension attachment: this directs part or all of a pension to the other spouse when it comes into payment; or
- Pension offsetting – a party receives a higher share of the other assets available (e.g. property) in lieu of pension.
A recent example
In the recently reported case of W v H  a number of important aspects in relation to pensions and divorce were considered.
In that case the Wife was aged 50 and the Husband was aged 48. The parties had been married for 17 years and had three children together who were to reside with the Wife. There was around £240,000 equity in the former matrimonial home. However, the Husband had a pension pot valued at c £2m. The Husband was seeking to exclude around 58% of his pension from the matrimonial asset pot on the basis that he had brought this to the marriage. The Wife wanted to offset her pension share entitlement in order to be able to retain the former matrimonial home.
The following points were discussed by the court:
- Capital equality or income equality:
Consideration needs to given to whether or not capital equality (i.e. the values of the pension schemes totalled up and divided by two) or income equality (i.e. equalising the actual income produced by the pension upon retirement) is the most appropriate basis for division of the pensions .
The court set out that there might be some cases where capital equality was the most appropriate option, particularly if:
– the value of the pension is small as a proportion to the value of the overall assets; or
– where the parties are young and therefore projections in relation to income are very unreliable.
There are however scenarios where a capital division was unlikely to be fair, particularly where:
– the pension pot is medium to large;
– the value is significant in proportion to the assets; or
– the needs of the parties can only be met with reference to pension assets.
2. Pensions accrued before or after the relationship:
Where one party is seeking to exclude a proportion of their pension from the assets available for division on the basis that it was accrued before or after the relationship then this will now come down to the issue of “needs”. This effectively means that it will be more difficult to argue that any element of pensions should be excluded from pensions calculations if the needs of the other party require it to be included.
The court expressed concern that, whilst parties might choose pension offsetting for a number of reasons, it can lead to unfairness in the long term. If possible, parties should try to deal with each class of asset separately. Where offsetting is being considered, it is particularly important that the involvement of a pension actuary is sought at an early stage.
How to decide what to do with pensions upon divorce
Prior to negotiating a settlement, it is important to provide and receive full disclosure in relation all pensions held (whether in payment or not) including:
- Private pension schemes;
- Work based pensions; and
- Any additional state pension
The figure that you need to obtain is the “cash equivalent transfer value” or “CEV”. This is a cash value that is placed upon your pension benefits within a particular scheme. This figure is not always included on annual statements and you may therefore need to contact the pension provider and specifically request this information for the purposes of divorce proceedings.
CEVs should be requested from each pension provider at the earliest possible opportunity as it can take several weeks or even months for this information to be prepared and sent.
Pension schemes can be 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 a chronology of your employment positions (and that of your spouse) 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.
Expert advice from a pensions actuary should be sought to assist parties and solicitors with the process. The independent actuary would usually be appointed by the parties (via their solicitors) jointly in order to assist with issues such as:
- The true values of the CEVs as the information produced by the pension schemes can be incorrect (for instance often public sector schemes have a significantly higher value than an equivalent private sector scheme);
- How pensions should be divided to provide equality of capital and/or to equalise pension income upon retirement.
- Whether there are any specific benefits or restrictions in relation to particular schemes that could impact upon settlement. By way of example, there are certain pension schemes that radically increase in value overnight following a certain number of years served.
When it comes to negotiating a settlement in relation to pensions, the outcome will depend upon the specific circumstances of your case.