In this three-part series, we’ll cover pensions in divorce. This final blog covers how pensions are split in a divorce, including what orders the court can make relating to pensions and what is a fair way to divide pensions. The other blogs cover:
Pensions can sometimes be the most valuable asset that a spouse will own. It is a largely an income-producing asset which will go towards meeting your income needs in retirement, but will also have capital elements attached to it.
Dividing pensions fairly in divorce is important as it is about securing your long-term financial future, including you meeting your income-needs in retirement.
Even if you have many years before you even think about your retirement, pensions should not be overlooked.
Dividing pensions in divorce: court orders available
The Court can make several orders in relation to pensions as follows:
- The most common is a pension sharing order, which is an order that a percentage of one spouse’s pension fund is transferred to the other spouse’s name, either within the same scheme or into another pension fund altogether, depending on scheme rules.
- A pension attachment order is an order that, once the pension is in payment, a percentage of the pension income is paid by the pension provider to the other spouse. The pension fund itself is not transferred so it remains in the name of the spouse who is the member of the pension fund. This is more rarely used as there are some advantages and disadvantages to consider which you would need to weigh up with your solicitor.
- Offsetting is when the spouse offsets, i.e. exchanges, their right to receive a share of the other spouse’s pension against keeping a greater share of the other assets, such as equity in the family home. There can be a significant risk of unfairness with offsetting particularly if the pension being offset is a DB pension and, generally, the court prefers pensions being divided separately from other assets.
As to what is a fair way to dividing pensions, the Court’s starting point generally in a longer marriage is to consider equalisation of pension incomes. However, the court may do this differently or depart from equality in certain circumstances, for example if necessary to meet “needs” or if “apportionment” is appropriate. The court also takes into account the factors in section 25 of the Matrimonial Causes Act 1973.
Depending on your circumstances, it may be appropriate to:
- Divide pensions by reference to the Cash Equivalent Transfer Values (CETVs) of the pensions;
- Divide pensions by reference to the fair & comparable capital value of the pensions which has been re-calculated by a pension expert; or
- Divide pensions by reference to the incomes the spouses will receive in retirement.
For example, if you are nearing the age when you can draw from your pensions (the age may vary depending on what types of pensions you and your spouse own) or if the pensions are public sector, then equalising incomes is more likely to be fair.
It may be possible to exclude the portion of your pension accrued outside of the marriage (including pre-marriage cohabitation) from being shared with your spouse. This is called “apportionment”.
Apportionment may be appropriate, for example, if it is a very short marriage, both spouses are young, and there are no children. Or if the value of the pensions are very large such that the spouse’s reasonable needs in retirement can be met with only dividing the part of the pensions accrued during the marriage (including pre-marriage cohabitation). Apportionment is fact‑specific and not automatic, and specialist advice is essential before assuming part of a pension can be excluded.
Offsetting pensions against more capital in the family home is generally discouraged as it may lead to unfairness. This is because you are comparing assets which are valued in different ways, and there are tax considerations. Further it risks the spouse giving up on the pension share being short of income in retirement, and the other spouse having difficulty in meeting their housing needs.
Even if you and your spouse have agreed how your matrimonial finances, including pensions, are to be divided, you will need a financial order.
The Advicenow guide provides support and recommendations if you’re going through a divorce and want to understand more about pensions.
However, it will be essential to get specialist legal advice as, not dividing pensions fairly, can cause long term financial irretrievable harm. Pensions are complex; considering the fairest way to divide these on divorce can be very tricky; and it is complicated to draft the pension sharing order and annexes.
Here to help
At FJG, our family law team is committed to providing expert, compassionate advice during one of life’s most challenging transitions. If you’re going through separation or divorce, we are more than happy to help you through that process; start on the right foot by seeking legal advice from our Family Law team.
Lisa O’Boyle is a Senior Associate Solicitor in our Family Law Team, specialising in family matters including children, divorce, financial matters arising upon divorce and domestic abuse.
For further advice on any aspect of family law or to discuss meeting with a family lawyer, please contact one of our team in our Colchester, Clacton or Chelmsford offices on 0845 543 5700, or via our online enquiry form.