Pensions are a valuable asset, particularly for older people who have amassed sizeable funds, so it will be vital to understand how they will be affected by a divorce.
How big is the pension pot?
In England and Wales, the total value of the pensions will be taken into account. This means all private and workplace pensions, and not just those that you or your ex-partner built up while you were married or in a civil partnership.
The best place to start is to list all of the different pensions you have between yourself and your former partner. Include all:
- Work pension schemes
- Personal pension funds
- State pension entitlement that is ‘protected’ under the old pre-April 2016 Additional State Pension (not the basic entitlement to new State Pension)
Entitlement under the New State Pension, which was introduced in April 2016, is based on an individual’s National Insurance contributions. This cannot be split on divorce or dissolution.
Under the pre-2016 system, however, you may have built up entitlement to both the old Basic State Pension and an Additional State Pension if you were employed.
Any amount of Additional State Pension based on earnings and National Insurance Contributions built up over the New State Pension is known as the ‘protected payment’ and can be split.
There are several ways pensions can be ‘split’ as part of a divorce settlement. It helps to understand the implications of each option.
There are a number of options available when it comes to splitting pensions.
A pension sharing order makes it possible to receive as much as 100% of your partner’s pension. It works by transferring the pension into your name or by being added to the pension scheme.
Deferred pension sharing is used if your partner has retired and is now receiving a pension but you are too young to retire and claim. Therefore, an agreement is put in place to share the pension at some point in the future.
Deferred lump sum sharing involves receiving a lump sum from the pension of your partner once they retire.
Offsetting a pension means the value of any pensions is offset against all other assets, for example, making it possible for one individual to keep the family home while the other keeps their pension.
Pension attachment order will entitle you to a share of any pension when it begins payment although you will have to wait until they start to claim it.
It is not compulsory to split pensions in a divorce. Divorcing couples can opt to come to an independent agreement rather than relying on traditional approaches to splitting pensions. Any such agreement should be based on financial and legal advice, and must be legally documented.
Which option is best?
The best option will depend on the circumstances, as well as the rules of any pension schemes.
Pension offsetting is usually the easiest option because it could be as simple as agreeing on your ex to keep their pension while you get the house and no court order is required. There is a short-term gain from having the house but it could mean that your income is reduced in the long-term.
Pension attachment orders, however, can be problematic because of the way in which you are left waiting for your ex to begin drawing their pension. There is also a lack of control over the assets while income will be susceptible to their income tax bracket.
A fair settlement can be achieved through pension sharing because part of the pension is yours and so there is no issue around control over income or assets. Therefore, assets are transferred across, providing control and a tax rate that is set at your own rate.
Divorce after retirement
If one or both of you have retired, it is possible for pension assets to be split, but there could be difficulties.
HMRC rules mean it is not possible to take a lump sum from the pension of your partner if they already receive an income.
Pensions are not shared if you are not married or in a civil partnership and this means that there is no financial protection in place. For those partnerships where there are children involved, the father will have to provide for the children but is not obliged to support his ex.
Pensions are rather complicated to many but there may come a time where you need financial advice. In those cases where pension pots are rather large, advice should be welcomed. Therefore, a financial adviser who is impartial and neutral should be used as soon as possible.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.