In the year 2000 legislation was passed enabling pensions to be split (or shared, as it’s called) on divorce, but it’s likely that many people are losing out unnecessarily because they are not getting the right advice. Pensions are complicated at the best of times but that doesn’t mean they shouldn’t be split fairly, whether you are the party holding the pensions or the party seeking a share of them.
Understanding your options
Unfortunately, many people don’t understand how they can split pensions or appreciate the consequences of getting it wrong. If you, your spouse or civil partner has a large pension you could lose out by thousands of pounds unnecessarily if you don’t get the right advice, usually achieved through the combined expertise of a specialist family law solicitor and an independent financial adviser with the required qualification to give specialist advice on pensions on divorce.
Can pensions be shared?
In very simple terms, the court can make an order ‘sharing’ one party’s pension(s) with the other party – a defined percentage of the pension pot is taken out and put into the other party’s name (usually in a different pension scheme but sometimes the same one if permissible) so that they have a pension in their own right.
But it is far more complicated than that, and fraught with risk, for a number of reasons, which are summarised below.
Pension terms and conditions can differ
Different pension schemes can adopt different methodologies, and make different assumptions, when providing values of pensions for divorce purposes. In some cases this can result in a significant under or over valuation, and on the face of it justification for a pension share when in reality that might not be appropriate. It could result in one party losing part of their pension unnecessarily, or not gaining a share of the other party’s pension when there is actually good justification for this.
The Cash Equivalent Transfer Value is important
The relevant Rules provide that the basis of valuation of pensions for divorce purposes is the Cash Equivalent Transfer Value (‘CETV’). This is just one of a number of possible ways of placing a current cash value on a pension. However, even if both party’s CETVs are similar, that does not mean that the actual benefits payable on retirement will be the same, as different schemes have different rules and entitlements. Some pensions will pay a better pension income than others, even though the CETV may be similar.
The value of pensions can be calculated in different ways
There are important decisions to be made about whether a pension share should be based on the CETV, or alternatively the value of the accrued pension benefits (which usually include a regular pension income and a lump sum on retirement). The correct approach will depend on a number of factors including the age of the parties and the duration of the marriage. It is very often necessary to commission expert advice from a specialist pensions actuary so that the real financial impact of the different approaches available can be considered and taken into account.
Pension flexibility can add complexity
There is now much more flexibility about how and when pensions can be drawn down. Typically 25% of a pension pot can be drawn at the age of 55 as a tax-free cash lump sum. This needs to be taken into account in any financial settlement.
In cases involving large pensions there may be issues around the ‘lifetime allowance’. This is the maximum amount which can be paid into a pension during someone’s life time without incurring tax penalties. It is currently £1.07 million. This will need to be taken into account in any financial settlement.
Pension companies can levy charges
Pension companies are permitted to levy charges for implementing pension sharing arrangements. These vary wildly – for example some companies don’t charge anything and the NHS Pension Scheme charges over £3,000. Where there are multiple pensions it may be cheaper to agree to share a particular pension.
Alternatives to a pensions share are available
An alternative to a pension share is what is called a ‘capital offset’. Basically, there is a cash payment to one party in consideration for them not having a pension share. This gives rise to complex quantification and valuation issues, which usually necessitate expert actuarial input. A pension asset which cannot be cashed in is not necessarily ‘worth’ the same as cash in hand.
State Pensions should also be considered
Lastly, let’s not forget about the State Pension. Your entitlement will depend on your working history and National Insurance Contributions. Sometimes one party has had a career break to have a family, and consequently may well not have a full State Pension entitlement. Again, this should be taken into account in any financial settlement.
The key message is to get specialist advice. Yes, that will come at a cost but this could well be a fraction of the cost of getting it wrong. The Family Law Team at Berwins includes lawyers who are Resolution Accredited Specialists in pensions on divorce (www.resolution.org.uk) and have the experience and expertise to secure the right and fair outcome for you.
William Kaye is a Senior Consultant within Berwins' family law team. He is highly regarded by both clients and contacts and has over 20 years' experience supporting separating couples.
Our dedicated and friendly team is here to help. If you have a matter you would like to discuss in confidence, please get in touch by calling 01423 509 000 or use our contact form online and we will get back to you as soon as possible.