Law Articles

Pension Sharing on Divorce/Dissolution 05/01/2024

Pensions are usually one of the largest and most complex assets to deal with on divorce. The starting point for many financial divorce settlements is a 50/50 split, but this can be adjusted if it does not achieve a fair result. There are three main methods for dividing pensions in a divorce: pension sharing, pension offsetting, and pension attachment (also known as earmarking).

Pension Sharing

This method provides a clean break between parties as the pension assets are split immediately. The court issues a pension sharing order (PSO) which states how much of the pension the former spouse will receive, expressed as a percentage of the transfer value(s) of the pension(s) that are to be shared.

Pension Offsetting

In this method, one party retains the total value of their pension, in exchange for providing their former partner with alternative matrimonial assets of the same value. This could include a share of the marital home or joint savings. Pension offsetting provides a financial clean break between all parties.

Pension Attachment (Earmarking)

Under this method, the pension still belongs to the scheme member, but the scheme is required to make some form of payment to the former spouse when the member's benefits become payable. This method does not provide a clean break as an ongoing link with the former spouse or civil partner will remain which is why this type of pension share is not often seen nowadays.

Each of these methods has its own advantages and disadvantages, and the choice between them depends on the specific circumstances of the divorcing couple. It's important to note that the division of pensions in a divorce can be a complex process, and professional legal and financial advice is often necessary to ensure a fair outcome.

PAG report

When advising clients on pension sharing options, solicitors will often refer to the PAG report, or the Pension Advisory Group report, which is a guidance document used in England and Wales to provide a framework for the fair division of pensions in divorce settlements. It was created by a group of legal and financial professionals to offer clear and consistent guidance on the treatment of pensions in divorce. The report covers various aspects of pension sharing, offsetting, and attachment, and aims to assist courts and legal professionals in achieving fair and equitable settlements when dealing with pension assets in the context of divorce. The PAG report is not a legal requirement, but it is highly influential in practice and is often used as a reference in divorce cases involving pensions.

The key recommendations of the PAG report for dividing pension assets in a divorce settlement include:

1. Rare Appropriateness of Apportioning Pension Values: The report established that it is rarely appropriate to apportion pension values, and in most cases, the whole pension pot will be shared to meet the objective of fair and just outcomes in the division of pension assets.                                                                                                                                                                    
2. Consideration of Short Marriages and Pension Apportionment: The report highlights that in exceptional cases, such as extremely short marriages or when pensions have considerable value, the family court might consider apportionment to be fair. However, this is an exceptional circumstance.                                                                                                                                                                      
3. Equalisation of Incomes Approach: In needs-based cases, especially where there is a significant defined benefit pension involved, the report recommends dividing the pensions separately from other assets based on an equalisation of incomes approach, rather than simply dividing the pensions by equality of capital value.                                                                                                                                                                                    
4. Home Responsibilities Protection: The PAGv2, an updated version of the report, expands on the section regarding Home Responsibilities Protection for non-working partners who may not have received enough National Insurance credits to qualify for a full state pension.                                                                                                                                                                                             

Pension Sharing Reports

A pension actuary plays a crucial role in divorce cases by providing expert advice and calculations on pension sharing. Their primary task is to assess the value of the pension funds and expected payments for each party, considering various factors, such as the type of pension schemes, target retirement dates, and the ages of the individuals involved. The actuary's report aims to guide the fair division of pensions to ensure the desired outcome for both parties.

This report is typically commissioned jointly, with each party paying half of the actuarial fee. It provides a clear picture of how to split the pensions, taking into consideration any pre- or post-marriage/separation accumulation of pension benefits where applicable. The actuary's involvement is essential, especially when there are multiple pensions involved, to ensure a comprehensive and equitable settlement. Where pensions are of small value though, it may not be necessary to obtain such a report purely because it may not be cost effective.

Pension sharing on divorce can be very complex so legal advice is highly recommended.

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.