Pension Sharing and Pension Attachment Orders

How should pensions be treated on divorce?

Pensions can be overlooked when it comes to financial settlement on divorce and this usually leaves the financially weaker spouse at a disadvantage. Even when each spouse has had similar salaries or income during a marriage, if one has taken a period of time off, they are likely to have accrued a smaller amount of pension. Where there has been a large income disparity, the pension disparity will of course be larger.

Typically, this issue has affected women more, as they are more likely to take time off work for caring responsibilities and are more likely to return to work part-time than their husbands. Despite this, recent research from Scottish Widows indicated that a third of divorced women did not discuss pension assets at all during divorce.

I always raise the subject of pensions with my clients and these are some of the most common questions I am asked:

Do our pensions matter in divorce?

The short answer is “yes”. When it comes to reaching a financial settlement on divorce, all assets between the couple should be taken into account. This includes more liquid capital assets (i.e. cash, investments and property) which can be accessed now and pensions that can be accessed later.

How will the court deal with pensions?

Pensions will be taken into account as part of the overall division. The court can do this in several ways – either as an asset on one spouse’s side of the balance sheet (i.e. the other spouse might get more capital to “offset” that pension) or commonly by way of a pension sharing order.

What is a Pension Sharing Order and will it prevent us from having a clean break?

It is a common misconception that if spouses’ pensions are shared, there will not be a clean break between them. In fact, a Pension Sharing Order will take a percentage of one spouse’s pension and put it into a completely separate pension pot, which then belongs to the other spouse.

This means that each person is then able to continue to build up their respective pensions after divorce, without any claims from the other. They are also able to access their pensions independently, rather than having to wait for the person who originally had the pension to start drawing down.

Can I get a Pension Attachment Order?

Prior to Pension Sharing Orders, it was more common to have a “Pension Attachment Order”.  This is widely out of favour now, except for some specific circumstances. This is because, rather than creating a separate pension pot, a Pension Attachment Order will provide a ringfenced amount of pension which can only be accessed once the original pensioner starts drawing down. The right to the pension attachment also ends with the death of the original pensioner, which can leave the spouse with the attachment order in a vulnerable position

What pensions can be shared on divorce?

Almost all English or UK-wide private and workplace pensions can be shared and it is usually possible for Scottish and Northern Ireland pensions to be shared as well.

Pensions which are already in payment can be shared, as can the additional state pension and the protected payment element of the transitional rate of the new state pension.

Some overseas pensions can be shared – and these will need to be considered on a case-by-case basis. Generally, a court will only make a pension sharing order where there is compelling evidence that it will be implemented in a foreign jurisdiction. However, the court will also consider other remedies (for example, a pension attachment order, if that would be accepted in the other jurisdiction, or offsetting against other assets).

The court cannot share the basic state pension or the new state pension.

How are pension assets valued?

For people below pension age there is a restriction on access to a pension fund – so it is a different class of asset to property, cash or anything else which can be liquidated.

When it comes to valuing pensions on divorce, your pension provider will provide a “cash equivalent value” – however these need to be considered carefully. For a money purchase pension scheme (also known as a “defined contribution” pension) this can be quite straight forward. Pensions which have a defined benefit element (i.e. a “final salary” pension) are more complex to value as different schemes will have different assumptions.

Where there is a defined benefit pension or mix of both types of pension, it is often wise to obtain a pension sharing report from an Actuary, which will explain the best way to share pension benefits. Pension sharing reports will usually take into account factors such as the difference in ages between spouses and health issues linked to life expectancy.

Do pensions really matter if we are a long way from retirement?

With the cost of living ever increasing, financial advisors say that care should always be taken to consider provision for both spouses in retirement. It is therefore important to take specialist advice when it comes to agreeing a financial settlement on divorce and to ensure it encompasses all the assets available to both spouses.  This is particularly important if there are significant assets and pensions to consider.

Reaching a financial settlement on divorce can be stressful, but our team of divorce lawyers can provide the support and guidance you need to make informed and well considered choices, both in terms of process and outcome. Do contact us to find out how we can help you.