Does a pension matter on divorce?
By Christine Pick, Family Law Specialist
Yes, a pension may be one of the most important and valuable assets on divorce. Even if you’re not going to retire for many years, it’s one of the assets which should be taken into account, when dividing assets between divorcing couples. If it is ignored on divorce, it could cost you dear in the future, and although one of you may need a higher proportion of the other assets, the hidden value in a pension needs to be considered.
In calculating a financial settlement, one of you may need a higher value from the capital assets e.g. the house, savings accounts, shareholdings. If so, the other one may receive a lower value from the pensions.
In most cases, if you share the value of your pension pot equally, it won’t result in an equal income for you both on retirement. Because of this, it’s usually necessary to instruct a pensions expert to calculate the impact of a proposed pension share, then based on this advice, a divorcing couple will know what a pension share will give them
Pension sharing is an investment for your future. To obtain the best advice on how a pension share should be calculated to cover your needs, you will incur not only legal costs, but will also be paying for a pension actuary to prepare a report and put in place the arrangements for sharing the pension fund. These costs may be shared with your spouse.
For your own future security, if you are receiving a pension share, a pension accredited financial adviser will then provide advice to you about which pension fund to invest your pension share into for you to obtain the maximum benefit. You can then make a fully informed decision about the age when you draw your pension, unlike the state pension where the government plans to raise the pension age to 67 within the next 10 years.
Once a final financial order is made on divorce, there is unlikely to be any come back in the future if a pension isn’t fully taken into account. Because of this, an investment in pension advice at the time of divorce is money well spent for your future. Especially when millions of people aren’t saving enough for their retirement and have to rely on their State Pension of £168.60 per week or less.
Which pensions to share?
Often the parties will have a number of pensions, and there is a choice as to which pension should be shared. Choosing the wrong pension to share could result in both parties having considerably less pension per annum in their retirement.
Alternatives to pension sharing
Pension sharing is not the only option available to parties to address an imbalance in pension assets upon divorce. Other remedies such as offsetting and (less frequently) Attachment orders do exist. Valuing pensions for offsetting, especially if they are final salary pension schemes can be very difficult, and the expert should be able to help the parties understand these options, and how to value pensions for offsetting.
- An expert will often identify issues which have been overlooked by others, such as the fact that one party’s pension may not benefit from annual increases, whereas the other party’s pension increases each year in line with inflation.
- Some insurance company private pensions have “hidden values” such as guaranteed annuity rates, which if missed could lead to a distortion in the settlement, or if a pension sharing order is made over such a policy, a destruction of real value.
- Some schemes are extremely complicated – such as the Uniformed Services (Armed Forces, Police, and Fire) and a lack of understanding of the benefits in such a scheme, or how a pension sharing order will be implemented, could lead to serious unforeseen issues.
- Some schemes will allow the beneficiary of the pension sharing order a choice – either to retain the pension credit awarded within the scheme, or to transfer the credit into a scheme of their own choosing. Where such a choice exists, it is important that the ramifications are understood.
- In some cases it is suggested that pensions accrued either before marriage or cohabitation, or accrued post separation will need to be ignored. This is a trickier job than many realise, and to do the necessary calculations in an equitable way often requires the input of a pension expert.
There is an emergence of firms specialising in negligence claims where pensions have not been considered adequately in divorce cases. There is a very good reason for this – pensions are incredibly complex, and their value is often not appreciated. Whilst parties may be reluctant to spend money to get expert advice, the cost of such advice can pale into insignificance against the cost of getting it wrong.
In addition, the instruction of a Single Joint Expert can save an awful lot of time and money in debate and argument.
For advice on divorce contact our specialist Family Law Solicitors on 0800 160 10 10.