Pensions form part of the total assets that a court will consider following a divorce, and they can either be shared or offset against other assets. Therefore, it is possible to offset your pension against the value of the former matrimonial home, but this will depend on all the factors that a court must consider, especially the respective values of the pension and the house, how close both parties are to retirement and your respective incomes.
What can the court do with my pension?
It is important to remember that pensions are not viewed as a special asset that should be ringfenced, so their values are treated as a resource alongside any other asset or income stream, even if they are personal rights and more complex than other assets.
The court may deal with your pension in one of the following ways:
- They could follow your suggestion and your pension can be offset against the value of other assets, such as the house;
- The court can make a “pension attachment order”. This allows for a portion of your pension fund to be paid to your ex-partner once it becomes available (after the age of 55 under ‘pension freedoms’). This is really just a form of spousal maintenance paid directly from your pension fund. The disadvantage of this to you is that it does not allow for a clean break, and your ex-partner may not be amenable to it as they are unable to retain full control of their pension fund – furthermore, if they cease to be entitled to the pension, so do you;
- The court may make a “pension sharing order”. This actually splits the pension fund between the two of you, allowing you each to have control over when your portion is paid out, and whether you reinvest your share in a different fund. The fund can be transferred so as to be divided into any percentage share depending on your ex-partner’s own income capacity and any pension that they might have of their own.
How does the court decide what to do with my pension?
The court’s decision is governed by s.25 of the Matrimonial Causes Act and the resultant “sharing principle” which has the starting point of equality. Under s.25, the court must have regard to the following factors in particular:
- The income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future;
- The financial needs, obligations and responsibilities which each of the parties to the marriage has or is likely to have in the foreseeable future;
- The standard of living enjoyed by the family before the breakdown of the marriage;
- The age of each party to the marriage and the duration of the marriage.
Points (a), (b) and (d) are particularly relevant when deciding whether a pension can be offset, or whether a pension sharing order is necessary. The court will look at what income and assets there are available to you and work out how they can meet your respective needs whilst adopting the “sharing principle” of starting with assumptions of equality.
What is the ‘sharing principle’?
The sharing ‘principle’ is different to a ‘sharing case’ in that the principle is to assume that equality should guide the allocation of resources whereas a sharing case is one where the available resources are so substantial that all reasonable needs can be met and so needs cease to require that additional provision and other principles may come into play. Here we discuss the sharing principle, not the factors of ‘sharing cases’ which were highlighted in the Pension Advisory Group ‘Guide’ which judges have been regarding for the last few years.
Relevance of the sharing principle to offsetting your pension
In a long marriage (roughly 10 or more years including cohabitation) the starting point in any financial settlement is equality, so it helps to proceed on the assumption that the assets will be divided roughly 50/50. This means that you should consider whether the value of your pension is roughly equivalent to the house, as it will be difficult to offset it if its value is much higher unless there are other assets that can also be used to reach a balance. Similarly, you should consider whether your proposal to offset the pension against the value of the house will mean that you end up settling for much less than you are entitled to.
Applying the sharing principle also comes into play when considering each party’s income needs. Offsetting your pension against the house will not meet your ex-partner’s income needs if they have no income or pension provision as they will be left with a house that they cannot afford to run. The court has to ensure that both of you will have access to an income that will meet your needs. The closer both parties are to retirement, the more relevant your respective pension provisions become, because you will each have only limited time to build a pension fund. If you are approaching retirement and your ex-partner has very little or no pension provision, then it is more likely that the court will address this issue through a pension sharing order to ensure that they have an income.
How does the court work out the value of the pension fund?
In the first instance, you will need to obtain the CETV (Cash Equivalent Transfer Value) of your pension. You can request this once every 12 months. This represents the amount that your provider would offer you to transfer out of your current scheme. It is a helpful starting point for you, as it can be measured against the CETV of any pension fund that your ex-partner has, but it is not the same as the amount of money that you can receive as a lump sum or as an income.
Each fund’s trustees apply their own actuarial assumptions to the pensions managed by them and are not standardised, so although the experts say comparing a pension to the equity in a house may be like comparing an apple to a pear, pensions may be as unlike each other as a Bramley and a Braeburn.
In cases where the pension is a significant issue, it may be necessary to instruct a pensions actuary who can calculate the approximate income that you would be likely to receive if you were to keep paying into your fund in the same way until retirement. This projection can then be used to compare your respective incomes post-retirement. The report will usually cost up to around £2,000, but depends on the complexity of the schemes. Many people are put off by this cost, but they can save time and money in the long term, as each party will then be able to see what the future income might be in cases where there is a dispute around income capacity.
When can a pension be offset against the house?
Offsetting a pension against the house is a good option in circumstances where you are both approaching retirement and your ex-partner has a retirement income that will meet all their day-to-day expenditure, but not their housing needs. It can be a simple and clean solution to financial proceedings, allowing you both to move forward independently.
It can also be a sensible solution for couples who are 10 years or more from retirement, both are working, the property is the right size for a family, but is capable of being downsized once the children leave home and equity can be released. In these circumstances, there may be enough time for your ex-partner to build their own pension provision, and any leftover proceeds of sale can be used to supplement this.
When deciding whether offsetting your pension might be the right outcome for you, you should consider your own future housing needs too and whether your pension will be sufficient to meet them once you have retired.
When might a pension sharing order be made?
The court will not offset your pension if you are close to retirement and your ex-partner does not have enough income to meet their needs. While it might be argued that they could sell the house and buy a smaller one, the proceeds of sale are finite, and the court is unlikely to adopt this approach when it would ensure that financial needs are met via a pension sharing order.
Similarly, the court is more likely to make a pension sharing order in circumstances where the couple is 10 or more years from retirement, but one party has little or no pension provision and limited earning capacity (for example, if they had stopped working for some years in order to bring up the children) because, unlike the example above, they will not be able to build a significant pension provision and would have to sell the house to make ends meet.
The court is concerned both with fairness and with the proposals meeting your long-term needs, so neglecting your own income requirements to get a home that you cannot afford may not meet with approval.
The effect of a pension sharing order is that you will each have your own distinct pension funds once the provider has administered the order. You can choose to re-invest it with another pension fund (external transfer) or to keep it with the existing pensions provider (internal transfer). Some schemes do not allow external transfers and that needs to be checked.
How can I find out what is appropriate in my case?
The best starting point is to find out how much your assets are worth. You should contact a qualified Family Solicitor to help you through this process. They will be able to help you to get the appropriate valuations in respect of your pension, the house and any other assets. Once you have a clear picture of the assets available, then they can advise you on what offers might be appropriate to make.
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