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There are several ways in which pensions can be shared on divorce/dissolution:
2. Pension attachment
3. Pension sharing
Before an agreement can be reached (or a court order made if the parties are in litigation) on how best to share pensions, both parties need to obtain an up-to-date valuation of their pensions, much like they would obtain a valuation of the family home and other matrimonial assets on divorce/dissolution. A Cash Equivalent Transfer Value (CETV) is the prescribed method of valuing pensions, irrespective of the pension order to be made. The CETV is the capital value of the pension rights calculated by the pension scheme provider and the calculation relates only to the pensionable service up to the date of calculation and does not consider any future salary increases. The CETV essentially gives an idea of how much the pension is currently worth but, given how complex some pensions can be, it may be necessary to obtain an expert report from a pension actuary as to the true value of the pensions and specific calculations on how the pensions could be divided to provide a certain income for each party on retirement. Actuary reports can take many weeks, sometimes months, to complete and can be quite expensive so such reports are not always financially viable or even necessary if the pensions are not very valuable or the parties have pensions of similar value.
This is the most straightforward option where one party retains a pension by compensating the other party with their share in other available matrimonial assets, such as the family home. This option is likely to be used in situations where the value of the pensions is small, where the parties have similar pensions of their own, or where the parties are very young and will be able to build up their own pensions.
When considering offsetting as an option, it is important to know that a value of £1 in a pension pot is not the same as £1 in cash, so it is not uncommon for parties to reduce the CETV by a certain percentage for the purpose of offsetting. The nearer the pension member is to retirement, the less (if any) reduction should be made to the value of the pension for the purpose of offsetting.
Under a pension attachment order, the pension provider pays some or all the monthly pension payments directly to the former partner, but only when the member partner retires irrespective of the age of the former partner. The ownership of the pension never transfers to the former partner; they simply receive an income from the pension for the duration of their life or until they remarry or form a civil partnership. A pension attachment order also ends when the member partner dies. This type of order is subject to variation by either party which causes much uncertainty and does not provide the parties with a clean break.
Other possible issues with such orders include the member partner delaying their retirement or not paying funds into their pension post-divorce/dissolution, both of which may have a profound effect on the former partner if their main or only source of income will be from the pension attachment. Given all these issues, it is no wonder such orders are rarely used, especially as there is the option of having a pension sharing order instead (see below) which provides the parties with certainty and a clean break on divorce/dissolution.
Pension sharing orders came into force on 1 December 2000. Such orders divide pension benefits between the parties at the time of divorce/dissolution, which means the legal ownership is transferred from the member partner to the former partner at the time of divorce/dissolution. Once the pension sharing order is made, the former partner can transfer their share of the pension to another external pension fund if they wish, assuming the pension provider allows it; some public sector pensions do not allow external transfers which means the former partner’s pension must remain with the original pension provider, but it will still be a totally separate fund from their former partner’s pension fund. Some pensions cannot be shared, such as the state pension.
The pension share is always expressed as a percentage of the CETV. As the CETV fluctuates over time, by the time the pension sharing order is implemented, the value of it may have changed from the date of the original CETV. There are sometimes costs associated with pension sharing which can be quite high, so the parties should agree in advance about how those costs should be met.
It is not possible to have a pension sharing order and a pension attachment order against the same pension.
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.Back to Law Articles