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A pension is a long-term investment which provides a regular source of income when a person retires which cannot be accessed until retirement. The government provides a State Pension to those who have reached State Pension age, which varies depending on date of birth and gender. To qualify for the full basic state pension, a person must have paid or been credited with 35 years of National Insurance contributions. Those with fewer qualifying years will receive a reduced pension payment.
To prepare financially for retirement, some people additionally pay into their own privately funded pensions and/or make pension contributions into their employer's pension scheme, with their employer also making contributions.
When parties divorce or dissolve a civil partnership, all assets owned jointly or individually fall into the "matrimonial pot" and division of pensions is a key part of legal negotiations. After the matrimonial home, a pension may well be the largest asset to be divided between the couple.
Each party will be required to obtain valuations for every pension policy they hold. The valuation used by the Family Court is the Cash Equivalent Transfer Value (CETV), which is calculated and provided by the pension provider. This details the current valuation but does not, for example, forecast its growth or future value.
When parties are negotiating a financial settlement, there are three options available when dealing with pensions. The first, and perhaps simplest option, is pension offsetting where each party retains their pension assets in full and the other party receives more of the other capital assets. However, the value of pensions for offset purposes should be calculated by a pension actuary to ensure the offset figure is correct because one pound in a pension pot is not equal to one pound in cash.
An alternative option is pension sharing. A Pension Sharing Order details how pension benefits will be divided between the parties when the divorce or dissolution is finalised, i.e. upon pronouncement of Decree Absolute. One party will receive a "pension credit" and the other a "pension debit". This means that at the time of division the benefits will be transferred from one party to the other. The credit is calculated as a percentage of the overall pension. The receiving party may keep the pension with the current provider or choose to have the benefit paid into an existing or a new pension scheme although this is not available with all pension providers. A Pension Sharing Order achieves a clean break between the parties with no links to the former spouse when the pension is later drawn.
The final option is pension attachment. A Pension Attachment Order allows the court to order the pension provider to pay all, or part of, the pension scheme member's benefits to their former spouse upon their retirement. The receiving party's pension payment will however cease on the payer's death or the receiving party's remarriage or death. So, if a wife were to receive benefits and her former husband died, her payments would cease.
In most cases involving pensions, it is prudent to obtain a report from a pension actuary to advise on the options for pension division.
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