Financial settlement on divorce: Why your pension matters

A recent survey from Which? revealed that seven in ten divorcing couples do not share their pensions.

However, this could be a grave mistake when reaching a financial settlement on divorce as pensions often rank with property as the two biggest sources of assets accumulated over the course of a relationship. Options available for sharing pensions are reviewed below.

Pension sharing orders

The Welfare reform and Pension Act 1999 introduced the concept of pension sharing orders allowing non-members to have their own pension pot independent from their spouse. A pension sharing order works by immediately splitting one spouse’s pension fund, based on a percentage which is calculated on the value of the pension, the day before the order is implemented. This is extremely valuable as it means the pension fund will be as up to date as possible. A further advantage of this is that it achieves a clean break between the parties as the pension fund is split immediately and two separate pension pots are created from one. The pension sharing order will take effect once decree absolute has been received and it is the responsibility of the pension provider to implement the pension share within 4 months of the date of the Final Order. However, it is important to note that if the pension holder, the transferor, dies the day before the transfer is due to take place, or before Final Order is pronounced, then the pension share will fail.

When it comes to pensions that are located overseas, the Court’s position as per Goyal v Goyal is that the Court is unlikely to make a pension sharing order, if it will not be enforceable overseas and especially if the overseas pension scheme indicates they will not implement the order in that jurisdiction. The party seeking a pension sharing order for a pension located overseas will then need to produce compelling evidence that the order will be enforceable in that jurisdiction. In Goyal, the wife did not produce evidence that the pension sharing order will be enforceable in India, where her husband’s pension was located. Her claim for a pension sharing order therefore failed.

Pension offsetting

A pension sharing order is one of the most popular orders parties seek, however there are also other methods of creating a pension settlement on divorce. Some parties may wish to offset their pension against other assets, most commonly the family home. A party holding a particularly large pension may not want this to diminish, so they may choose to offset the value of their pension against another matrimonial asset e.g. family home, so that they take less of the equity in this or none at all. The offsetting will make up for the value of the pension the other party is seeking to claim. It is therefore important that the value of the pension and the assets are as accurate as possible, to ensure the offset is fair. This method will also achieve a clean break. Furthermore, unlike a pension sharing order you can offset your pension in this jurisdiction against assets in another.

Pension attachment orders

There is a third type of pension order known as a pension attachment order, however these are the least popular and are not frequently utilised. With these orders there are no separate pension pots, but rather part of the member’s pension is redirected to their ex-spouse when it comes to payment i.e. once the member draws their pension benefits. This means the ex-spouse must wait until the member retires and this could be delayed to the ex-spouse’s detriment. This order also does not provide for a clean break as the ex-spouse will be receiving their share of the pension as part of periodical payments, meaning they will always have a financial tie to their ex-partner. Additionally, this order will cease on the marriage of the non-member and lapse on the death of the member which results in uncertainty as to a party’s financial security upon retirement. These orders are therefore the least recommended of the three.

In summary

Some divorcing couples may be put off seeking a pension settlement on divorce as they may believe this is complicated or not obtainable in that each party’s pension is their own. Others may simply think that a financial settlement is all about who will get the family home. However, a pension sharing order is a useful tool in cases where one party’s pension may be significantly smaller than the other, and they are worried about their source of income once they retire. Offsetting is also a useful tool to the spouse who wants to ringfence their pension if it is substantial and similarly provides a clean break. It is therefore worth considering such means when reaching a financial settlement on divorce and not completely dismissing the importance a pension can hold.

Written by: Megan Porter (Trainee Solicitor)

If you have any enquiries regarding divorce or finances, please contact a member of our family team on 020 8290 0333 or email info@judge-priestley.co.uk.