Pensions and Divorce

We have come a long way since the initial legislation governing pensions and divorce was developed in 1973 via the Matrimonial Causes Act.

The upshot is that there are now three ways of addressing pension wealth in a divorce situation, each with their upsides and downsides.

Offsetting

The first method is to offset the value of the pension rights against a calculation of the value of other matrimonial assets, keeping pensions intact.

In many ways this is the simplest method available – it creates a clean break and, where both partners are reasonably well off, can be an effective approach. It is often used where overseas pension assets are involved to avoid the complications these create.

However, offsetting can throw up many challenges for the less well-off partner, particularly in relation to working out how to preserve any capital and indeed how to eventually turn that into a retirement income.

Earmarking

This refers to an attachment order made by the court, which requires a proportion of the pension benefits to be paid directly to an ex-spouse instead of to the member.

Before the most recent legislation came into force in 2000, this was a more common method of sharing, however it is little used now due to its significant downsides. For instance, the benefitting spouse could lose their entitlement if they remarry or, depending on the details of the pension scheme, once their ex-partner dies.

Needless to say, it definitely doesn’t produce a ‘clean break’.

Pension sharing

This option, now two decades old, is an acknowledgement by the state of the complexity of pensions.

The aim of pension sharing arrangements, generally requiring a court order, is to calculate the value that needs to be transferred to allow a spouse to achieve equal value or income by becoming a member of the pension scheme in their own right with the benefits shared between the two parties or transferring it into their own pension scheme. This has the obvious benefit of not being tied to the other spouse’s retirement date, enabling both parties to act independently in the future.

As with everything, though, there are some drawbacks. Not least, it affects the recipient’s lifetime allowance (LTA), that is, their ability to add additional funds – meaning high earners must take particular care.

Property v Pensions – Dispelling the Misconceptions

We still see instances of spouses without significant wealth veering towards the offsetting property route with little regard for the wealth contained in a pension.

While a family home could be worth perhaps £500,000, a pension from a long-serving employee could be worth more.

We aim to bring common sense to bear in making clear the best decision for the long-term.

Planning for the Future

Finally, once the settlement has been agreed there is the essential role of implementing the plan.

For the less well-off spouse a key consideration is likely to be when they can afford to retire. The better-off partner, on the other hand, will likely be considering how to rebuild their pension.

Divorce isn’t easy, but it is common. Independent financial advice has an essential role to play for clients in helping understand their situation, and choose the best options from there.