Law Articles

A Brief Explanation to Pensions on Divorce and Dissolution 15/07/2024

Dividing pensions during a divorce and dissolution can be a complex process. It is essential to understand the basics of pensions, how the court deals with them, and the steps involved in calculating and dividing their value.

Types of Pensions

State Pensions

State pensions are provided by the Government and are based on your National Insurance contributions. The two main components are the Basic State Pension and the Additional State Pension (or State Second Pension). It is important to obtain a state pension forecast to understand the potential income from this source. You can do this by completing a form BR19.

Occupational or Workplace Pensions

These are pensions provided by your employer. They can be defined benefit schemes, which promise a specific income in retirement, or defined contribution schemes, where the value depends on contributions and investment performance.

Private Pensions

Private pensions are set up by individuals and can include personal pensions or stakeholder pensions. The value of these pensions is also dependent on contributions and investment performance.

Steps for Calculating Pensions

• List all pensions held by both parties, including state, occupational, and private pensions.

• Contact pension providers to obtain up-to-date valuations and statements.

• Request a cash equivalent value for each pension. The CEV represents the amount that would be transferred if the pension were shared or transferred to another scheme. (for defined benefit schemes, it's crucial to understand the CEV and the associated benefits, as the CEV alone may not reflect the true value).

• Both parties must share the obtained pension information. This includes cash equivalent valuations, benefits statements for defined benefit pensions, and state pension forecasts. If mediation or legal representatives are involved, they can facilitate the exchange of documents.

• Ensure all relevant pension information is disclosed accurately and comprehensively. Incomplete or inaccurate disclosure can lead to disputes and potential court intervention.

• Consider seeking expert help if the total value of pensions exceeds £100,000 or involves defined benefit schemes. Complex pension arrangements or significant disparities in pension values between parties often necessitate expert advice. 

• Weigh the cost of expert help against the potential benefits. Expert advice can provide clarity on the true value of pensions and help achieve a fair settlement, which is especially important given the long-term financial impact. Financial advisors or pension specialists can provide detailed valuations and advice on dividing pensions. Actuaries can offer insights into the true value of defined benefit schemes and help in calculating fair division.

Working Out Your Options When You Know the Pension Values

Pension Sharing Orders

Pension sharing orders divide the pension at the time of divorce, transferring a portion of one spouse’s pension to the other. This option provides a clean break, allowing both parties to manage their pensions independently post-divorce.

Offsetting

Offsetting involves balancing the value of pensions against other assets. For example, one spouse may retain the pension, while the other receives a larger share of the marital home or other assets. This approach avoids splitting the pension but requires careful valuation of all assets.

Pension Attachment Orders (Earmarking Orders)

Pension attachment orders direct that a portion of the pension benefits be paid to the other spouse when they become payable. This option does not provide a clean break, as the recipient is dependent on the pension-holder’s retirement decisions.

Reaching an Agreement about Pensions

Use the gathered information and expert advice to negotiate a fair agreement. Mediation can help facilitate discussions and reach a mutually acceptable solution. Ensure that both parties understand the long-term implications of the division.

If an agreement is reached, it needs to be approved by the court to become legally binding. This is crucial to ensure the agreement is enforceable. The court will review the agreement to ensure it is fair and meets both parties' needs.

If You Cannot Reach an Agreement

If negotiations fail, seek the court’s intervention to resolve the division of pensions and other financial matters. The court process may involve filling out detailed financial forms (e.g., Form E) and providing comprehensive financial disclosure.

The court will issue an order that both parties must follow. This could include pension sharing orders, offsetting arrangements, or pension attachment orders. The court aims to ensure a fair and equitable division based on the specific circumstances of the case.

Implementation

Once an agreement or court order is in place, notify the pension providers of the division arrangements. Provide the necessary documentation to facilitate the transfer or adjustment of pension benefits.

Implement the division as agreed or ordered, which may involve transferring pension funds or adjusting pension benefits. Ensure all legal and administrative steps are completed to formalize the division.

Conclusion

Dividing pensions in divorce requires a thorough understanding of the types of pensions involved, their values, and the available options for division. By following the outlined steps and seeking expert advice, you can ensure a fair and legally sound division of pensions. Whether through negotiation, mediation, or court intervention, the goal is to achieve a settlement that meets both parties' future needs, particularly in retirement.

For further information and advice on this issue, and other family law issues, please contact us for a free initial consultation on 01992 306 616 or 0207 956 2740 or email us.