Pensions on Divorce

Pensions on Divorce

Pensions are generally one of the largest assets to a marriage, following the family home, and consideration must be given by the courts as to how they should be dealt with upon a divorce.

The way in which pensions have been treated upon a division of the matrimonial assets has changed in recent years and the courts have struggled to define pension rights and whether they should be treated as capital on a deferred basis or as deferred income.

Prior to 1996, pensions were deemed to be an asset with a future benefit.  Therefore, if separation occurred prior to the milestone age being reached by a party and the initiation of the drawdown of the pension, they were generally not given much consideration.

This very much limited the courts’ powers to be able to take into account the likely contribution that pensions might make to the overall needs of the parties unless the impact was likely to occur in the “foreseeable future.” The term “foreseeable future” was generally deemed to be within the next ten years following settlement of financial matters.

Another issue with the way that pensions were dealt with was the types of orders that were made. It was common practice for lump sum orders and joint lives periodical orders to be made. These would both kick in when the spouse whose pension was in question had reached their milestone age and had started to draw their pension. The Court therefore had no choice as to the election of a milestone age or when retirement was likely to take place and this could be used as an effective delaying tactic by the paying spouse to the receiving spouse. Furthermore, there was no protection afforded in the event of the death of the paying spouse before the drawdown of the pension.

 The case of Brooks v Brooks was a landmark case which changed the landscape of how the courts deal with and adjudicate over pensions. The facts of this particular case centre around a pension scheme which was set up during the course of the marriage by the husband to provide benefits for himself and his wife in retirement.

The Pensions Act 1995 made it compulsory for the courts to account for pensions when valuing the assets to a marriage and introduced the notion of earmarking orders – now known as Pension Attachment Orders. This was introduced by way of sections 25B-25D to the Matrimonial Causes Act 1973. The court’s powers arose in this regard for divorces petitions filed after 1st July 1996.

Pension Attachment Orders require the spouse responsible for a pension arrangement to pay a percentage of the pension income (essentially a deferred payout) to the other spouse upon drawdown of the pension. One of the disadvantages of this arrangement is that the receiving spouse does not receive any payments until the paying spouse receives their pension and furthermore, there is no protection upon the death of the paying spouse if they prematurely pass away ahead of drawing down on the pension.

It is commonly during the process of financial disclosure by way of completion of Form E’s that the parties to the marriage are required to provide the cash equivalent transfer value (CETV) of their pension. If a Pension Attachment Order is made, practically the income/lump sum is paid direct form the pension provider rather than the spouse with the benefit of the pension. The order can either take effect immediately or as a deferred order depending on whether the person with pension rights has retired or not.

Pension attachment orders are effectively periodical payments or lump sum orders and are deemed to be financial provision orders. In accordance with the Matrimonial Causes Act 1973, by re-marrying or entering into a civil partnership precludes a spouse from making an application unless the application was made before the remarriage or subsequent civil partnership.

Further changes have since taken place and it is important to understand the full range of options available when dealing with pensions.

It is common for parties to want to equalise their retirement provision (particularly in long marriages) by sharing the pension resources. A party may wish to draw a tax free lump sum upon retirement which will be treated as capital and the balance of the pension fund will be drawn as income.

By simply splitting the value of the pension pot in half may not achieve the desired outcome of an equal split for various reasons which include (a) the respective ages of the parties (b) their life expectancies and (c) the rationale as to what the pension funds would but the recipient by way of income on retirement. One option to assist in negotiating a fair percentage split is to instruct a pension’s expert although in many cases their instruction is disproportionate.

The main options in terms of dealing with pensions within financial remedy proceedings are as follows:

  • Pension Attachment Orders – these have been dealt with above and are not as common as the other two options referred to below;
  • Pension Sharing Orders
  • Offsetting

Pension Sharing Orders

Pension sharing is the process in which an existing pension arrangement is divided between the two parties by way of a percentage. The person with the benefit of the pension fund effectively transfers a percentage of their pension fund to the receiving spouse.

It is prudent to check with the pension provider to ascertain whether it is a pension that will accept Pension Sharing Orders. It is also essential that the legal representative has a thorough knowledge of the nature and any limitations of any pension redistributions that are being made pursuant to an agreement together with the implementation process to ensure that their client’s interests are protected to avoid any adverse delay.

Re-marriage or entering into a new civil partnership does not generally affect the terms of a pension sharing order. Death also generally has no effect on an implemented pension sharing order.

Offsetting

Pension offsetting is a common practice used to offset the value of the pension resources against the value of the other assets to the marriage. In this regard, the courts do not make any pension orders and the pension rights remain with the pension member.

This process effectively adjusts the distribution of non-pension assets to take into account that one party will have less valuable pension provision. This practice can be very helpful when one party wishes to retain the family home in lieu of future pension provision or where pensions rights cannot be shared where there are overseas pensions.

Consideration will be given to the fact that pensions are generally a deferred benefit (depending on the age of the party who wishes to protect their fund) and credit must be given to the fact that they will be receiving little capital by way of an offset.

Whichever avenue is explored, it is essential that independent financial advice is also sought to assist with the practicalities of implementing your chosen option together with understanding any tax implications which may arise.

If you would like more information on the contents of this article please contact Javita Malhotra on 01494781358 or email jmm@blasermills.co.uk.