In many matrimonial cases pensions are the most valuable asset of the marriage, although many do not realise that both their own pension and their spouse’s pension is considered a matrimonial asset. Depending on the age of the spouses the pension may not provide an immediate income, however it should not be overlooked as to how valuable the pension is as an income stream in retirement or a bargaining tool to ensure that you receive a fair settlement in respect of the capital assets which are available immediately.
Currently the new state pension can be claimed at the age of 66, however this is due to increase to age 67. Most private pensions (depending on the type of scheme) can be accessed (normal minimum pension age) from the age of 55, however this is set to rise to 57 in April 2028.
The value of all the financial resources available to meet the spouse’s needs, including the pension will determine whether the pension asset(s) is to be shared on divorce.
When divorcing spouses are resolving their finances, they are required to provide each other with full and frank financial disclosure. This includes but is not limited to evidence of their means including interests in any property or land, bank accounts, savings and investments, income and pensions.
There is a lack of understanding around the value of a pension, and many believe the fund pot shown on their annual pension statement is the value of the pension fund. However, this is not the case for divorce purposes.
Family lawyers are not financial advisors and depending on the value and type of the pension(s) in question specialist financial advice may also be needed from a Pensions on Divorce Expert (PODE).
Types of pensions
There are three main types of pensions:
- The state pensions (basic, additional and new).
- Private pensions: Defined Benefit (DB) and Defined Contribution (DC).
- Schemes in the Pension Protection Fund (PPF).
The way these pension schemes work is very different, and the type of pension will determine how the value of the pension is calculated.
Valuing Private Pensions
When negotiating a matrimonial financial settlement, as part of the disclosure process spouses are asked to obtain their Cash Equivalent Transfer Value (CETV) for each pension they have. This is the value of the pension for pension sharing purposes considering the fund value and all of the benefits attributable to the pension if the pension were to be purchased on the open market on the day of the valuation. Depending on the pension scheme it can take some time for this to be calculated so it is always best to request the CETV as soon as possible.
Where spouses are close to pension age it is also worth obtaining a copy of their state pension forecast.
DB Pensions
Also known as final salary pensions, they are reliant on the years of pensionable employment, the accrual rate and salary of the scheme member. The value is based on the cash amount the scheme trustee on divorce is prepared to pay in exchange for the scheme member giving up their entitlement to guaranteed benefits. As the cost of securing a guaranteed return or income rises, CETV’s in general tend to rise. When the cost of providing a guaranteed income falls so does the defined benefit of the CETV.
DC Pensions
These can be workplace pensions, stakeholder pensions, personal pensions, self invested personal pensions (SIPPs) and small self-administered schemes (SSASs). Contributions are invested and the pension at retirement age depends on how well the investment has performed. The CETV is the value of the underlying asset less any relevant charges or penalties. The CETV will fluctuate in line with the investments selected.
The McCloud Pension Remedy 2018
In 2015 there were reforms to public sector pensions, which in simple terms moved members from final salary schemes to career average pensions. In 2018 the Court of Appeal held this was discriminatory as older members who were within 10 years of retirement were able to remain on the final salary scheme, whereas younger members were transferred to the less favourable scheme. Some members were able to use both schemes if their age fell somewhere between.
The outcome was that when members who were in service between 1 April 2015 and 31 March 2022 reach retirement age, a decision will be made by the member as to which scheme it would have been more beneficial for them to be a part of during this period and decide which pension they receive.
In respect of divorce, when the CETV is calculated the scheme must make this determination at this time. The member is not held to this decision in retirement, and it is only used for the purpose of calculating the CETV.
If you or your spouse may be affected by the McCloud judgement, is it essential that any CETV is McCloud compliant, and you should take expert legal and or financial advice.
Pension Orders
Before deciding what pension order (if any) is required, the value of the pension(s) are necessary to determine whether any agreement reached is fair in all the circumstances and does in fact meet your needs, both now and in the future.
It is also necessary to know whether the pension is required to provide an equality of income and or an equality of capital upon retirement. The use of a Pension on Divorce Expert (PODE) is usually required to be able to advise on the relevant figures.
Pension Sharing Order
Once it has been determined how much of the members’ pension is required to be paid to the other spouse, the court can make a pension sharing order which must be implemented by the pension scheme to take effect. This should always be dealt with at the time the order is made.
The pension sharing order provides a cash lump sum (expressed as a percentage) to be paid from the member spouses pension (debit member) to the other (credit member). Different schemes have different rules. Some allow the credit member to have an internal transfer. This means the cash sum is paid into a pension for the credit member within the existing scheme. Alternatively, the scheme may not provide this option and only an external transfer is possible. This means that the cash sum is paid into a scheme of the credit members’ choice. It is important to note that the cash sum must be invested into a pension, it is not paid directly to the credit member. The value of the pension share is not guaranteed and could go up or down at the point when the pension sharing order is implemented by the pension scheme.
It is also important to take independent financial advice about the effect a pension sharing order can have on existing pension arrangements as well as where to invest on an external transfer and potential tax consequences.
Pension Attachment Order
The pension scheme is required to pay benefits directly to the credit member when the debit member retires. The debit member can decide when the benefits come into payment and can delay taking them. When the debit member dies the payments stop to the credit member and therefore the income is not secure for the credit member. The payments may also cease if the credit member re-marries.
Offsetting
When a spouse would prefer to receive a cash lump sum or a greater share of the other matrimonial assets rather than a pension sharing or pension attachment order, a pension offset can be agreed. In this case there is no pension sharing order, so the members’ pension remains intact. The lump sum will usually allow for a slight reduction based on the fact the money is available immediately rather than waiting until pensionable age. A PODE may still be necessary to determine what the appropriate offset figure should be.
Before dismissing the pension as a matrimonial asset to be shared you should always take independent legal advice as well as financial advice to be sure that any decision you make about matrimonial pensions is fair and in your best interests.
At Ison Harrison, we understand the difficulties and uncertainties facing our family clients whether that be navigating the upset and complexities separation brings or planning for and protecting their future. We have a wealth of experience in our Family Law department, and we have specialist lawyers waiting to help you with your divorce and finances. We can also recommend expert third parties to assist you when necessary, so contact our experienced team today. You can contact us on 0113 284 5000 or email mail@isonharrison.co.uk.
