Pensions form part of the assets that can be distributed between a couple on divorce/dissolution. This guide will provide you with an overview of what you need to know about pensions if you are separating or getting divorced.
What pensions can be shared?
- Defined benefit/final salary schemes (for example public sector schemes)
- Defined contribution/money purchase schemes (for example personal pensions, SIPPS and some occupational schemes)
- Additional state pension. If you reached state pension age before 6 April 2016 your additional state pension can be shared. This is the amount paid on top of any basic state pension.
- Protected payment element of the new state pension. If you reach state pension age on or after 6 April 2016 your protected payment can be shared. This is the amount paid on top of the standard weekly rate of the new state pension.
Where can I find details of my pensions?
To help find contact details for workplace and personal pension schemes and lost pensions visit https://www.gov.uk/find-pension-contact-details
To obtain your state pension forecast apply online using Form BR19 or check your state pension forecast at https://www.gov.uk/check-state-pension
To obtain details of your additional state pension or protected payment apply using Form BR20.
You can also check your national insurance contribution history online herehttps://www.gov.uk/check-national-insurance-record.
How are pensions valued?
Pension administrators are required to provide a ‘cash equivalent value’ (CEV),sometimes referred to as the cash equivalent of benefits or cash equivalent transfer value. These are all essentially the same and mean the capitalised value of the pension benefits. The value is notional, based on what the value of the pension would be if transferred to a new scheme. It is calculated on the basis that the member leaves the pension scheme on the date of the calculation; no account is therefore taken of future membership.
Pension administrators must provide a CEV within 3 months of receiving a request. They will not make a charge for providing the CEV statement provided no valuation has been supplied within the previous 12 months. If a pension sharing or pension attachment order is likely to be made you should also ask your pension administrators to complete the Pension Inquiry Form (Form P).
If financial remedy proceedings have been issued the CEV must be no more than 12 months old prior to the first directions appointment.
Although the CEV is the prescribed method of valuation on divorce it is not the only one and, in some instances, it may not be a fair basis for valuing the pension benefits. A pension on divorce expert (PODE) can be instructed to help you value your pensions and work out how to share them.
You will also need to evaluate whether you want to achieve an equalisation of income on retirement or an equalisation of capital. Whether a pension should be viewed as deferred income or capital depends on the circumstances of the case rather than on the type of pension. As a rule if it is likely that tax free lump sums will be withdrawn, they are seen as capital and the balance of the funds are viewed as a deferred income, whereas a pension in payment is only viewed as an income stream. In some cases it may also be appropriate to apportion the pensions to the period of the relationship and ‘ring fence’ the contributions made prior to the relationship or post separation.
What methods of division are there?
There are three main methods of settlement: pension attachment, pension sharing and offsetting. A combination of these methods can be used to achieve a settlement.
It is not possible to make a pension adjustment or pension sharing order against a foreign pension and English pension providers neither recognise nor implement pension sharing orders made in foreign courts.
Pension sharing orders divide the rights under a pension so that each spouse has a share of the pension. A pension sharing order must be expressed as a percentage. Some schemes only offer an internal transfer which means the spouse receiving the pension credit has to keep it in the same scheme, whilst other schemes permit a spouse to transfer the pension credit to an alternative scheme of their choice.
Pension administrators will usually make a charge to implement a pension sharing order. These charges do vary from scheme to scheme and should therefore be checked before concluding any agreements.
A pension sharing order takes effect from the later of 7 days after the period of appeal following the making of a financial order, or the date of decree absolute. The period of appeal is usually 21 days, so the earliest a pension sharing order can take effect is 28 days after the order has been made by the court. The pension administrator must implement the pension sharing order within 4 months of the date the order takes effect or, if later, 4 months from the date they receive all required information to proceed with implementation (this will include the pension sharing order, decree absolute and payment of the implementation fee).
Pension schemes are not bound by the CEV at the date of the order. The CEV is recalculated at the time of implementation.
Offsetting is the process by which the right to receive a present or future pension is traded for present capital.
Difficulties can arise in deciding the value to place on the pension rights because pension funds are not directly comparable with other assets. Pension experts can be instructed to advise on the appropriate amount and generally apply three methods: the cash equivalent value; a figure based on calculations for equality of income or capital; or a figure based on the value of the pension holder’s present or future benefits.
In recognising that a pension has different investment and taxation characteristics to capital, consideration can be given to discounting the pension value to reflect these differences. For example, a discount could be agreed to reflect the tax that the pension member will pay once the pension is in payment. There may also be other reasons to apply a discount or an enhancement to the value. Whilst pension experts can advise on the valuation method and adjustments, it is ultimately a matter for the parties to decide or, failing agreement, a matter of judicial discretion.
Pension attachment order
A pension attachment order provides for a proportion of the pension income, lump sum or death in service benefits to be payable to a spouse. These orders are variable, and the benefits are lost on remarriage or death. These orders are rarely used since the introduction of pension sharing orders.