The issue of pensions on divorce can be difficult for separating couples. A person who has built up their own pension pot may feel aggrieved that they are having to share it with their husband or wife when he or she has failed to build up a pension pot.
On the other hand, the person seeking half of their spouse’s pension may feel entitled to a share of the pension pot on the basis that they have been unable to build up a pension pot if, e.g. they spent years at home raising the children.
The power of the court to deal with pension assets on divorce is in the Matrimonial Causes Act 1973 sections 24 and 25.
The court has the power to make the following orders in relation to pensions on divorce:
Pension Sharing Order
A pension sharing order involves a percentage of one party’s pension being transferred to the other party. At that point, neither party has any further interest in the other’s pension pot and they can each build up their respective pensions without claim from the other.
Pension Attachment Order
A pension attachment order is where a percentage of one party’s pension is set aside for the other party to then claim at retirement. The pension remains with the paying party and the risk with such orders are that the receiving party could lose entitlement to the pension if they remarried or the spouse dies.
Pension Offsetting
The court can make an order such as a lump sum order or a property adjustment order in lieu of a pension sharing or pension attachment order. This is known as “Offsetting”. This involves offsetting the amount that a party is entitled to get from the other party’s pension with other assets such as e.g. the equity in a property or cash savings.
With any of the above options, it is fundamental to obtain specialist legal and financial advice in order to ensure that any order relating to pensions is fair with full appreciation of the value of the assets involved.
When it comes to how pensions are shared on divorce whether, by pension sharing, attachment or offsetting, the general principle is that pensions accrued during the marriage are subject to the sharing principle as set out in the case of (White v White).
Pensions built up during the marriage are considered matrimonial assets and as such the starting point is that they should be shared equally. In those circumstances, pensions would be equalised.
An example may be wife has a pension of £50,000 husband has £170,000 – total pot is £220,000 so to equalise matters each needs a pot of £110,000 so the husband would have to transfer £60,000 to the wife.
In order to calculate how to achieve equalisation may need specialist financial advice.
Whether your spouse will be entitled to a percentage of your pension will depend on a number of factors including whether:
- he or she has his/her own pension fund which needs adding to the pot before equalising?
- was the entirety of the pension built up during the marriage (including prior cohabitation) or is there any pre-marriage or post-separation accrual?
- Will equalisation of the pensions meet the parties’ needs?
- The age of the parties including whether they are of a similar age and how far away they are from retirement?
If you would like any further advice or assistance in respect of the treatment of pensions on divorce, contact us today.