When you share out the assets that you own between you to get a financial deal, literally everything that could be regarded as a resource should be disclosed and considered in your divorce. Pensions are a resource and unlike earnings, are guaranteed without further contribution from the holder.
Your ex-partner may be entitled to a share of your pension. The fact that your pension is already in payment does not stop it from being included in the pool of assets that the court can divide when making financial orders in divorce proceedings.
The court will need to consider the impact that any division would have on your income, whether pension sharing is appropriate and/or cost effective in your case and if to be shared, how to work out what is fair.
The starting point in most cases is for sharing of all of the pensions, whether earned before marriage or after separation. There are exceptions to full sharing, but the starting point is that they will be seen as a resource and shared to meet needs. Ultimately, the court must consider the total income and assets available for division when coming to its decision. It is particularly important to get legal advice if your pension is in payment, as you will probably need to get expert advice on the effect of a Pension Sharing Order from a pensions actuary. Some schemes are more complicated that others and pensions in payment need careful consideration.
What should I do if I am receiving my pension and getting divorced?
If you find yourself in this situation, several factors require careful consideration:
- Existing Pension Arrangements: The court will evaluate the financial circumstances, including any existing pension arrangements to determine a fair division. This may involve reviewing the income, value, and accessibility of the pension already being received.
- Financial Needs and Future Planning: It is essential to consider your financial needs and long-term planning when negotiating pension sharing. Consulting a financial advisor or pension specialist can help you assess the potential impact of sharing and explore alternatives if necessary.
- Seek Legal Advice: Given the complexity of pension sharing in divorce, it is crucial to consult a Family Solicitor with expertise in pensions. They can guide you through the legal process, ensure your rights are protected, and help to ensure that you receive a fair settlement if the matter proceeds to court.
How does the court make its decision?
The court’s primary objective is to achieve a fair and reasonable distribution of assets, taking into account various factors which are outlined in s.25 of the Matrimonial Causes Act 1973. These include:
- The resources of the parties – even if there are reasons why assets should not be shared equally or not shared at all, the resources must all be disclosed so the court can see as full a picture as possible.
- Needs of Both Parties: The court considers the financial needs, resources, and earning capacities of both spouses when deciding on pension sharing. This assessment aims to achieve a fair and reasonable outcome that considers the overall financial circumstances of each party.
- Length of the Marriage: The duration of the marriage is a crucial factor in determining whether a pension should be shared. Generally, the longer the marriage, the more likely it is that the pension will be subject to division on the basis of seeking to equalise income.
The court’s starting point in any divorce is equality. This approach is set out the leading case of White v White and means that the court will aim for around a 50/50 division of assets and pension income. There are circumstances in which a party may get more than 50%, but in a longer marriage (generally over 10 years which may include any period that you lived together before marrying) it is best to assume that the income and assets will be divided equally.
That is also the starting point for shorter marriages, but other factors will more easily displace that starting point than in much longer relationships. In very short marriages, sharing may be deemed inappropriate.
How are pensions divided in divorce proceedings?
The court has a range of orders it can make. They can either make a Pension Sharing Order, a Pension Attachment Order or offset your pension against other matrimonial assets.
Sharing is preferred, Attachment is not considered as good and Offsetting is useful in some circumstances.
How do Pension Sharing Orders work?
Pension Sharing Orders are the most common method of pension division in divorce as they allow for a clean break between the parties by transferring a specified portion of the pension into a separate fund for the non-member spouse. This means that they have their own pension fund, and you can each do what you want with your own pension. Once the court has determined the percentage of the pension to be shared based on the above factors, the pension provider then establishes a separate pension for the non-member spouse, ensuring they receive their share of the pension benefits independently.
Pensions may sometimes transferred to a different scheme (‘external transfer’) rather than the fund remain with the existing scheme. You need to know whether external transfers are possible when considering your options as not all pensions can be moved from that provider.
The court will look at all the income and assets available to determine whether this is an appropriate order to make, as the order would inevitably result in a reduction to your income. It is often appropriate to instruct a pensions actuary in cases where the pension is already in payment to get an accurate view of how much your income will reduce.
It is important to note that pension sharing orders can only be made in relation to private and occupational pension schemes. State pensions are not subject to sharing but may still be taken into account when assessing the overall financial settlement.
Even if proposed otherwise, the court would usually want to make a Pension Sharing Order in cases where one party has a lower projected retirement income than the other, and where this disparity in income cannot be dealt with by giving the lower income party a greater share of the assets which could be used to generate income. Income from owning a rental property bought with capital is an income stream, so although it would not be ‘offsetting’ in the sense of replacing the value of lost rights, on an income basis, it can be an alternative.
What is a Pension Attachment order?
Pension Attachment was devised before full sharing became possible and was not enthusiastically adopted once it became possible, due the a number of important draw-backs. Once sharing became possible, Attachment has not often been considered, but still exists.
With a Pension Attachment Order, a portion of the pension income will be redirected from the you to your ex-partner. The attachment order can specify a fixed amount or a percentage of the pension income to be paid.
Once the attachment order is issued, it must be served on the pension provider or administrator responsible for making the pension payments. The provider is legally obligated to comply with the terms of the attachment order. The pension provider will redirect the specified portion of the pension income to the recipient. You will continue receiving the remaining portion of the pension income.
An attachment order can be set for a specific period or until a triggering event occurs, such as the death of either spouse or the remarriage or cohabitation of the recipient spouse. The order may also include provisions for cost-of-living adjustments or other modifications over time.
They are more unusual orders as they do not allow for a clean break and may cease on your death or remarriage. It is far more common for the court to make a Pension Sharing Order or order that your pension be offset against other assets.
How does Pension Offsetting work?
It may be possible to offset the income you are receiving from your pension against existing marital assets. For example, if there is enough equity in the former matrimonial home to adequately rehouse both of you, then your ex-partner may receive a greater share that can be offset against the pension income you are receiving. This can only work if they have enough income coming in to meet their needs once they have been rehoused and cash-flow projections are sometimes used to see if income needs are likely to be met. Sometimes people will adopt a hybrid approach of using capital to meet housing needs, but also making a lower transfer and sharing capital unequally. That approach may be helpful if one or other has a distinct preference for capital compared to pension rights. Sharing is not just to equalise income, but once that amount is known, people discuss their preferences with that as common knowledge – often having been generated by having a pensions on divorce report.
The advantage of offsetting a small pension is that it may be possible to avoid the expense of instructing a pensions actuary and the expense on implementing a Pension Sharing Order. The Guidance for judges and lawyers is that taking a simple offsetting approach is safest when the schemes are modest Defined Contribution schemes with relatively reliable known values.
Which of these solutions will be best if I am already receiving my pension?
Before delving into the specifics of pension sharing, it is essential to understand the different types of pensions that may be subject to division. These can include:
- Defined Contribution Pension: This type of pension is based on the contributions made by the individual and their employer, along with any investment growth. The value of the pension fund is known, making it relatively straightforward to assess and divide. These pension funds would be more straightforward to divide through a Pension Sharing Order.
- Defined Benefit Pension: Also known as final salary or career average pension schemes, these pensions provide a guaranteed income following retirement based on salary and length of service. Dividing a defined benefit pension can be more complex due to factors like pension scheme rules, actuarial calculations, and potential loss of benefits. An expert report is usually required when there is a defined benefit scheme and it can be very helpful to have the input of a neutral expert who can explain the options in the context of the specific schemes being considered.
What should I do first?
You should contact your pension provider to obtain the “CETV” (Cash Equivalent Transfer Value) of your pension and then obtain legal advice from a Family Solicitor with expertise in pensions. Your Solicitor will need to see details of your pension, so ensure that you have access to all relevant paperwork. It is essential for retired individuals to understand their rights, seek legal advice, and consider their financial needs and future planning when navigating pension division in divorce. By doing so, they can make informed decisions to protect their financial interests and achieve a fair settlement.