Since the introduction of automatic enrolment into a workplace pension scheme in 2012, more people are actively saving for retirement by way of pensions. Pension assets are often one of the most valuable matrimonial assets to be shared on divorce but are sometimes overlooked in favour of cash assets that are readily available to meet needs.
There is often a disparity in the values of the pension assets of the parties to a marriage. If, for example, one party has taken on more responsibility for the care of their children, their ability to pay into a pension may have been reduced. In such circumstances, it is even more important to consider division of pension assets so that both parties’ needs in retirement are met.
According to Amanda Wilson, Partner and Family Solicitor at Berry & Lamberts, there are three ways of dealing with pension assets on divorce.
Since 2000 it has been possible to share most pensions on divorce including those already in payment. However, State Retirement Pensions cannot be shared. If there is a disparity in the State Retirement Pensions of the parties, that can be taken into account when deciding upon the appropriate percentage of the pensions to be shared.
In most cases it will be necessary to instruct a Pension on Divorce Expert to advise on pension sharing. The division of pension assets can then either be agreed between the parties and recorded in a Consent Order or ordered by a court in contested financial remedy proceedings.
A Pension Sharing Order becomes effective 28 days after the date of the order or upon pronouncement of the Decree Absolute/Final Order of divorce. The terms of it can then be implemented. The party receiving the pension share can decide where they wish their share of the pension to be paid. This can either be into a new pension in their name or into one of their existing pensions.
Following implementation of a Pension Sharing Order, each party will have control over their pensions and can, therefore, decide independently when to begin drawing their respective pensions. Pension sharing achieves a clean break between the parties.
With a Pension Attachment Order, the court can order that all or part of one party’s pension benefits are paid to their former spouse or civil partner at the time the pension becomes payable. The order can provide that the former spouse or civil partner should receive:
• All or part of the pension member’s tax free cash sum; and/or
• All or part of the pension member’s monthly income from the pension; and/or;
• All or part of any lump sum paid on the death of the pension member.
The pension will remain in the name of the pension member and the former spouse or civil partner will not receive the monies due to them until the pension member decides to retire. The former spouse or civil partner will, therefore, have no control over when they receive the monies due to them under the Pension Attachment Order. If the member spouse decides to retire early, the former spouse or civil partner could receive less than they anticipated under the Pension Attachment Order.
There would be an ongoing relationship between the parties and no clean break. Pension Attachment Orders are generally variable so there is no certainty in respect of the amount of pension that will actually be paid. If the pension member dies, the pension will generally cease which may leave the former spouse or civil partner in financial difficulties.
It was as a result of the issues and uncertainties around Pension Attachment Orders that Pension Sharing Orders were introduced. Pension Sharing Orders are, as a result, favourable in most circumstances.
In some cases a spouse or civil partner may decide to forego a Pension Sharing or Pension Attachment Order on the basis that they receive a greater share of other assets in return. This is known as pension offsetting.
A Court Order is required in respect of both Pension Sharing and Pension Attachment. An Order is not required in respect of pension offsetting. However, it is advisable for all agreements in respect of the division of matrimonial assets to be recorded in a Consent Order to ensure that the future claims of both parties are dismissed. In the absence of a Consent Order dismissing future claims, either party could bring a claim against the other in the future.
Amanda Wilson and our friendly family team are here to explain and guide you through legal matters relating to divorce and finances. Please get in touch on 01892 526344 or email firstname.lastname@example.org. For further information on all our family law services, please click here.
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The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.