29 May Pensions and Divorce or Dissolution
Pensions can be very valuable assets and it is important that they are considered when going through a divorce or dissolution.
It is not unusual for one person in a couple to have the greater pension assets, this may be fine if the relationship endures because the couple can utilise all of their pension assets to provide for them both in retirement. However, if the couple separate and have a divorce or dissolution then the person with no pension or the lesser pension assets may then financially struggle in their retirement.
The value of pensions can sometimes be overlooked by a couple going through a divorce or dissolution which is why advice should be taken from a family solicitor and a pension advisor who specialises in pensions on divorce or dissolution.
When will the court consider pension assets?
The court, when considering the finances as a result of a divorce or the dissolution of a civil partnership can consider whether it is appropriate for a financial court order to deal with pension assets. The court will, however, only consider such issues in the following circumstances: if you and your spouse/civil partner reach an agreement and send a financial consent order into court for consideration by a judge, or one of you makes an application to court and financial remedy court proceedings start, or one of you applies for a financial order as a result of an overseas divorce.
People often see divorce and finances as the same thing. However, while they are linked, if you just apply for a divorce or dissolution, the court will ONLY end the marriage or civil partnership, the court will not look at your respective financial claims against one another. If you want the court to look at the financial claims then you will either need to send a financial consent order into court or apply to court to start financial remedy proceedings.
People also assume that if they obtain Decree Absolute in divorce proceedings or the Final Order in a dissolution of a civil partnership their other half cannot then make financial claims against them. This is incorrect. Financial claims will remain open until they are dismissed by a court order, also some financial claims end upon remarriage. However, if a financial order is not obtained ending financial claims for a pension sharing order then even if your former other half remarries, their potential to make a claim against your pension endures, so failure to resolve the financial claims as a result of a divorce or dissolution could be very costly for you in the long run. It is therefore important to take steps to resolve the financial claims including pension claims when you separate from your spouse or civil partner.
What can the court do with pensions upon divorce or dissolution of a civil partnership?
The court has a variety of options when it comes to pensions which are as follows:
1. Pension sharing orders or pension compensation orders
A percentage share of one spouse’s pension fund or funds can be transferred into the sole name of the other person. A pension sharing order is expressed as a percentage in England and Wales. The person benefiting from the pension share will then be able to use their share to provide them with a pension at the age set by the scheme within which their share is then held with, or they can consider alternative options under pension freedoms.
Advice should be taken from a pension specialist who is familiar with dealing with pensions upon divorce or dissolution prior to agreeing on pension sharing.
Advice should also be taken from a pension advisor if you are getting a share under a pension sharing order because pensions are complicated assets, you will need advice about where to invest your share of the pension and to look at any tax implications.
A pension compensation order is only appropriate when a pension scheme has gone into the Pension Protection Fund. It works just like a pension sharing order.
2. Offsetting
The court may feel it is appropriate for the person with the greater pension assets to transfer some of their pension assets to the other person. However, instead of their being a pension sharing order the person who would have received a pension sharing order instead takes cash or another asset or property or a greater share of a property instead.
The difficulty is comparing pension benefits to cash, as they are two completely different assets. It is like comparing an apple and a banana. It is therefore important to obtain advice from a pension specialist who is familiar with dealing with pensions on divorce, as opposed to a general pension advisor, prior to agreeing on the offset figure.
3. Pension attachment order
This can be a risky option with the new pension freedoms and so very careful consideration will need to be given before going down this route. It is an order which provides for the pension scheme to pay income from the pension, when it starts paying out, to the other person and or a share of benefits paid under the pension scheme. There are risks to having a pension attachment order, due not only to the new pension freedoms but also, if the person with the pension dies, the payment of income to the other person under the pension attachment order ends. Consideration will need to be given to whether death in service benefits, death benefits or life assurance cover is put into place to provide the survivor with capital to draw down from if the person whose name the pension is held in dies.
When should you deal with pension issues arising from a divorce or dissolution?
It is advisable to deal with the financial issues arising from a divorce or dissolution by way of a financial order prior to obtaining Decree Absolute in the divorce or a Final Order in dissolution proceedings. The reason for this is that while you are married or in a civil partnership, if one of you dies, the pension of the deceased may pay out to the person’s spouse or civil partner, but if this is the case and the divorce or dissolution had already been finalised, they would then financially loose out. It is therefore advisable to seek advice earlier on if a divorce or dissolution is being contemplated.
If pension issues have not been resolved but Decree Absolute or a Final Order has already been granted it is important to get legal advice promptly, do not delay.
How does the court decide whether a financial order is to take into account pension assets and whether to make a pensions order?
The court will look at all the circumstances as a whole, taking into account the following factors:
a) The income, earning capacity, property and other financial resources which each of you has or are likely to have in the foreseeable future, including in the case of earning capacity any increase which it would be in the opinion of the court reasonable to expect one or both of you to take steps to acquire;
b) The financial needs, obligations and responsibilities which you each have or are likely to have in the foreseeable future;
c) The standard of living enjoyed by you both before the breakdown of the marriage;
d) Your ages and the duration of the marriage;e) Any physical or mental disability either one of you may have;
f) The contributions which you each have made or are likely to make in the foreseeable future to the welfare of the family;
g) The conduct of a party (however the court are very reluctant to look at conduct unless it has been so bad that it would be inequitable to ignore it);
h) Any loss of benefit that might arise due to the fact of the ending of the marriage, e.g., pensions.
In effect, there is a balancing act between your needs and your former partner’s needs and obligations and your respective abilities to meet those needs in the context of the marriage or dissolution. The discretion given to the court is very wide and different circumstances carry different weight with different judges.
Pension assets are complex and often very valuable and so often a pension advisor is instructed to advise on how the pension assets should be divided, the expert can look at pension sharing and offsetting as well as attachment, if appropriate. This is a specialist area and so it is important the right expert is chosen and they are asked to answer the right questions.
Simply looking at the value of the pension pot “cash equivalent or transfer value” of a pension is often not the way to look at pensions, it is the income that they produce which is more important and often expert advice is needed to calculate the income.
If advice is taken from a pension expert it can then be used to help you and your partner to reach an agreement so a financial consent order can be submitted to court or to help the judge decide what type of financial order to make, if you and your partner cannot agree.
If you would like advice about pensions upon divorce or dissolution please contact Genette Gale our Family Solicitor and Collaborative Lawyer on 01747 852377 or g.gale@rutterslaw.co.uk