When going through a divorce, people often overlook the fact that their pensions are likely to be their largest assets, other than their family home.
In negotiating a financial settlement between divorcing parties, it is essential to ascertain the value of their pension funds. This is known as a Cash Equivalent value (CE) and determines what their pension would be worth on the open market at the date of calculation. It is worth erring on the side of caution with some CEs, as final salary pensions and public sector pensions can at times be undervalued by the pension providers. In these circumstances, assistance from an Independent Financial Advisor (IFA) can be invaluable. It is also important to bear in mind that notwithstanding the CE of the pension fund, there will be no realisable cash available until retirement, unless the pension is already in payment and parties have opted to receive a lump sum. In view of the length of the marriage or civil partnership and the value of the pension fund, pensions can be an important issue for parties undergoing a divorce.
After Decree Nisi, the Court is able to make the following orders in respect of pensions, which will take effect upon Decree Absolute: Pension Attachment Order Under this Order, the pension trustees would pay a percentage of the lump sum or pension income, which would be received by one party upon their retirement, to their spouse or civil partner. These types of orders cease upon the pension holder’s death and the recipient’s remarriage. Therefore they tend to be better suited to scenarios, where the recipient is unlikely to remarry or the pension holder is close to reaching retirement. Pension Sharing Order This is the most common type of Order made regarding pensions. It allows one party to receive a percentage of their spouse or civil partner’s pension.
This can be done by way of internal transfer, which would allow the recipient to become a member of the pension holder’s fund, or external transfer, which would transfer a pension credit into the recipient’s own pension fund. The rules of the pension schemes in place will dictate what type of transfer can be made. It is worth noting that a Pension Sharing Order can only be implemented by Court, when approving a financial order within divorce proceedings. Pension Offsetting This is the most simplistic way of dealing with pensions and refers to situations where one party will agree to waive any entitlement they may have to their spouse or civil partner’s pension in exchange for other assets i.e. larger share of the equity in the former matrimonial home or a lump sum. Offsetting can be ill-advised if based solely on the CEs of the pension funds, as the true value of the funds may be higher than that shown.
Again, specialist advice from and IFA may be required if parties are considering this as an option. At stevensdrake, we can advise clients of their rights regarding their spouse or civil partner’s pension, and discuss the options available to them as part of a wider financial settlement.
For more information, please contact the Family Department on 01293 596900. By Hana Khodabocus