After the family home, pensions are for many people the most substantial financial investment they will ever make. According to official data, from the Office of National Statistics, men approaching retirement aged 55 to 64 have an average pension worth £125,000, around three times more than women of the same age who have an average pension worth £42,300.
How the courts treat pensions on divorce
This depends on your circumstances. If a marriage is short and both parties are in their 20’s or 30’s their pensions may not need to be divided formally at all, although their value may be taken into account in other ways.
If the parties are in their 50’s pensions are likely to form an essential part of negotiations or the decision a court has to make . It will be necessary to look at pensions in the overall context of the family finances and you will need to think about certain key questions:
- What is the earliest date you can take the pension, (this varies between large company final salary schemes and private pensions) and also when are you actually likely to want to retire?
- What capital sum or income will each party be able to get from your existing pensions in retirement?
- What expenses do you think you will have when you retire, that is how much will you need to live on?
- Are there any other savings that can be used to meet your retirement needs?
The first thing to do is to identify what pensions the parties have.
There are different types of pensions with different rules. They work in different ways but with the overall objective of providing income and sometimes a lump sum on retirement.
Pensions form part of the overall package. Each party needs an income both now, and in the future, also each party will need somewhere to live. If you are in your late 40’s or 50’s you will need to plan for your retirement.
Sometimes it is possible for one person to keep more of the housing capital instead of sharing a pension. Then on retirement, they can downsize and sell their house and buy somewhere smaller to release capital to produce an income.
Swapping some or all of your pension rights for other assets is called offsetting.
How courts divide pensions on divorce
Most pensions can be divided by a court order under a pension sharing order. This can only take effect when the divorce is made final (decree absolute) and a court order for a pension sharing order is made.
The order can also be made by the court by agreement between the parties as part of the negotiated settlement.
If a pension sharing order is made resulting in the percentage being transferred from your pension into a separate pension in the name of your spouse, they will be entitled to the benefits of the pension completely independently of you. Their rights will not be affected by your death.
Usually the amount you receive as a result of the pension sharing order will be moved out of your spouse’s scheme and reinvested in your own new pension. Alternatively, usually with public sector schemes like the police, civil service and NHS you may have your own ex-spouse fund within the existing pension scheme. Even so, you will still be able to draw on the fund independently.
There are different ways to ensure that pensions are dealt with fairly on divorce. Sometimes the capital value of the pension (the transfer value) will be divided equally. Often, especially if you are both nearing retirement, a calculation will be made to try and produce equality of income in retirement.
Most pension companies provide annual statements which will give you a transfer value. Each scheme will have specific rules. You should consider getting professional advice about your pension, especially if it is a final salary scheme.
You should consult a specialist divorce lawyer and also consider advice from an independent financial adviser.
Advice is essential as so much depends on the type of pension and what it can provide in both cash and income and also on the other facts of the case.
Contact Terry at Wollens for specialist advice.