In this three-part series, we’ll cover pensions in divorce. This second blog covers when you are likely to need a pension expert report before you can consider a fair way to split pensions on divorce. 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 on 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. If you are going through a divorce and pensions are involved, specialist legal advice, and where appropriate, pension expert input, can make all the difference.
In our previous blog, we explained what the different types of pensions are and what information you need to obtain in respect of your pensions, and need to request from your spouse in relation to their pensions. Once you have the information in relation to the pensions you and your spouse have, the next step will be to consider whether a pension expert report should be obtained before you can consider a fair way to split pensions on divorce.
Because pensions are often complex, long‑term and tax‑sensitive, valuing and comparing pensions accurately and fairly is crucial. Expert advice is often essential to achieving a fair outcome.
When do you need a pension expert report?
A pension expert report is likely to be needed in the following circumstances:
– When the combined value of the pensions is in the region of £100,000.00 or more
Why? When the combined values of all of the pensions is low, the cost/benefit of obtaining a pension expert report may not be justified. However, in certain circumstances, even if pension values are low, pension expert may be needed for example (not an exhaustive list) if the pension includes Guaranteed Annuity Rates.
– When you are aged 50 and over.
Why? When you are of an age nearing retirement age, a fair way of dividing pensions is more likely to be equalising your incomes in retirement. The expert will be able to advise on what pension sharing order should be made for you and your spouse to achieve this.
– When there is a significant age gap between you and your spouse.
Why? The older spouse may need income from the pension now or soon. However, this pension income will be reduced if a pension sharing order is made, and yet the younger spouse may not be able to receive income from the pension share received for a number of years. The expert will be able to advise on the most appropriate options in those circumstances.
– When one of you has a serious medical condition.
Why? A serious medical condition which may affect life expectancy may mean that you, or your spouse, are able to get a higher pension payment as this will be over a shorter period. The expert will advise on how this could impact on the division of the pensions.
– When you and your spouse have a mixture of Defined Contribution (DC) and Defined Benefit (DB) pensions or other more unusual types of pensions
Why? DC, DB, and other more unusual types of pensions are different types of pensions with different benefits attached to them. The Cash Equivalent Values (CETVs) of these different types of pensions are calculated differently, which means that the CETVs may not be comparable. The expert will be able to calculate the values of each pension in a way that these can be fairly compared with one another, and calculate how to equalise pensions.
– When there is a Public Sector Pension.
Why? An equal division of the CETVs may lead to unexpected outcomes a pension expert can advise you to avoid nasty surprises.
– If you want to offset (i.e. exchange) some or all of your pension share against other assets such as the family home.
Why? £1 of pensions is not the same as £1 in other assets such as capital in the family home, as these are different types of assets which are valued differently. There are also tax considerations. Therefore, there is a high risk that using the CETVs to calculate how much capital should be exchanged instead of a pension share, will be unfair. The expert will be able to provide fair values for offsetting interest in pensions against other assets.
– When there is a choice as to which pension to share.
Why? Some pensions lose significant value when they are shared. The expert can advise you on whether there is a benefit, or disadvantage, to sharing one type of pensions rather than another.
If a report is necessary, Pension experts should normally be instructed jointly by both spouses. Your solicitor can help you consider whether a pension expert should be instructed, what questions the expert should be asked to report on, and prepare the letter of instruction to the expert. You will need to weigh up the costs of obtaining an expert report with the benefits you will get from expert advice, which you can discuss with your solicitor.
Usually the cost of the expert report is relatively modest in comparison with the value of the pension rights and the irreversible financial harm in retirement that could occur if pensions are divided unfairly.
If you are advised you do not need a pension expert report or if you already have a report, there are different ways in pensions can be split as explained in our third and final blog of this series.
The Advicenow guide provides support and recommendations if you’re going through a divorce and want to understand more about pensions.
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.