Pensions and divorce: It is a sad fact that many marriages end in divorce, what happens to the pensions and who do you turn to for advice in London? The immediate issues are the most crucial. Who will look after any children? Where will each partner live? How will each afford to live now? Equally important but sometimes often not prioritised is: how will each afford to live in retirement? The pension is usually in the name of the breadwinner. So what happens to pensions in the event of divorce?
A common solution is some sort of pension sharing order. But how is the value of the pension fund assessed? How do you ensure that each partner receives their fair share? How do you replace the lost income from one and top up the income for the other?
On divorce there are other issues: investing the proceeds of any settlement – perhaps to provide income; life and sickness cover on any maintenance payments and more besides…
Fairly and correctly allocating pension funds on divorce is a highly complex area requiring expert, specialist, independent financial advice. If you are a solicitor looking for expert advisers or someone who is unfortunate enough to be going through divorce Contact Us for confidential, expert advice in plain English.
Facts & Figures are Chartered Financial Planners there is no higher qualification for an independent financial adviser. We are based in Ashford in Kent; serving Canterbury and Maidstone as well. We supply written opinions nationwide.
Here are some of the technical issues to consider (NB the rules are slightly different in Scotland):
Offsetting, Earmarking or Sharing
The courts have 3 options to consider when dealing with pension rights on divorce. Although each case will need to be considered on its own merits the following may help to set out some of the advantages and disadvantages of each of the approaches.
Where offsetting is used the value of the member’s pension rights are taken into account in any divorce settlement – although the actual rights are retained by the member. In effect the value of the pension fund is set off against other assets of the member (e.g. the ex-spouse may receive other non-pension assets – e.g. matrimonial house) as part of the divorce settlement.
Offsetting may be attractive where: the divorcing couple are fairly young, both are at work, there are no children involved and there are sufficient non-pension assets to allow offset i.e. the couple’s assets are such that even after the split they are still large enough to provide each party with sufficient resources to carry on with their lives; perhaps the ex-spouse already has a decent retirement income, which would normally make pension sharing less appropriate.
Offsetting may be less attractive where: the member’s pension value is high compared to other assets -which may make offsetting extremely difficult; a replacement pension will be needed for the ex-spouse, which may be difficult to provide if the time to the ex-spouse’s retirement date and money are short; or if the ex-spouse is not working & life assurance benefits under the member’s pension scheme are lost by the ex-spouse.
Earmarking enables an English or Welsh court to direct the trustees of a pension scheme to make payments to an ex-spouse from the date the member draws benefits under deferred maintenance orders. Earmarking suffers from a number of problems including: the dependent ex-spouse can receive no benefit until the member decides, or is forced, to retire; the dependent ex-spouse will lose all benefits if they are predeceased by the member; the pension benefits will cease if the ex-spouse remarries; and the member may effectively be able to reduce the benefits of the deferred maintenance payment. For example, the member could opt out of their employer’s scheme and make alternative provision by means of a separate savings vehicle (e.g. ISA) which would not benefit the ex-spouse. The basis of benefits under the member’s scheme may change between the time that the court order is made and when the member retires; the ex-spouse will need to keep the scheme trustees advised of any changes in his/her circumstances (e.g. change of address, remarriage etc).
Earmarking can, however, be attractive in a number of areas including: where the divorcing couple are in their 50´s and other forms of maintenance provision are inappropriate. This will particularly apply where the ex-spouse is unemployable (either because of their age or lack of experience) where the pension scheme does not have any readily realisable assets (e.g. where a small self administered scheme is almost wholly invested in the company’s own property, this will make sharing very difficult) where the lump sum death in service benefit is earmarked for the ex-spouse; where the member is already in receipt of an annuity. Although it will be possible to “share” an annuity in future, earmarking may be seen as more appropriate in many cases. For example, where an annuity is shared it will be achieved by creating a new pension or deferred pension with the existing provider. As any new annuity will need to take into account the state of health and relative ages of the annuitants at the time, it is quite possible that the pension available to the ex-spouse will be lower than expected. For instance, a wife divorcing a husband of the same age could not expect to receive half of his pension because of her greater life expectancy. Where an annuity is earmarked the need to set up a new annuity for the ex-spouse will be avoided as he/she will be receiving a maintenance payment of part of the member’s annuity. However, there remains the risk that the member will pre-decease the ex-spouse which will result in the earmarked benefits ceasing.
Pension sharing has been available as an option within financial settlements on divorce and nullity of marriage where the proceedings commence on or after 1 December 2000.
Pension sharing provides an extension to the “clean break” principle. It seems most likely to be used in the following situations: where the ex-spouse is relatively close to retirement. The ex-spouse may find it very difficult to build up a comparable pension fund in the short remaining period to retirement ie where the divorcing couple are older. Here the ex-spouse will be able to take benefits from age 50/55 in respect of the “pension credit” rather than have to wait until the member retires (as would apply in respect of earmarking) where the ex-spouse may be thinking of remarrying. Unlike earmarking, any pension sharing arrangements would be unaffected by this.
Pension sharing may be less attractive where: the retention of the family home is a key priority for the ex-spouse. The sharing of the member’s pension rights may necessitate other assets to be shared (e.g. the family home). This could result in the sale of the matrimonial home and the need to trade down to a smaller property the ex-spouse already has adequate pension provision.
Implications For Occupational Scheme Trustees
The introduction of pension sharing raises a number of questions for trustees of occupational schemes. These include: will the trustees of a funded scheme be prepared to permit the ex-spouse to retain “pension credit” benefits under their scheme? If so will the benefits to be provided be the same as for other scheme members or be specially designed (e.g. perhaps where the “pension credit” benefits are on a money purchase basis although the scheme itself is final salary) In deciding the above it should be borne in mind that although the administrative costs of creating the ex-spouse’s benefits may be recoverable, other costs may not be. if the “pension credit” is to be transferred, what should be done if the ex-spouse has not designated the receiving scheme? Should a transfer be made to a pre-selected default scheme? does the scheme have sufficient “free assets” to enable a transfer to be made? what amendments need to be made to the scheme documentation to enable pension sharing to be undertaken?
While there are statutory override provisions to enable pension sharing to take place, schemes are still likely to want to specify the benefits to be provided for the ex-spouse in more detail. Moreover the rules will need to be amended to accommodate the contracted out “safeguarded rights” benefits will they recover any additional costs involved in the pension sharing scheme? And, if so, from whom? – the member, the ex-spouse, the member’s benefits or from the ex-spouse’s pension credit? What level of charges should be made in any event? what additional administration will need to be put in place? For example, pension sharing orders must be processed within 4 months of the order/arrangement being received. Special rules will apply in respect of benefits secured by the pension credit. Details of the pension debit, and pension credit if applicable, will need to be recorded on the member’s and ex-spouse’s pension scheme records. how can they ensure that they properly comply with any pension sharing order/ arrangement? what information will need to be given to scheme members concerning pension sharing and divorce issues generally? Will members´ benefit statements need to be amended to allow for any “pension debit”?
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