According to a recent Which report, a staggering 71% of divorces do not involve any division of pensions. This may well result in unfair outcomes for the spouse with no or lower value pension provision.
When considering an appropriate and fair financial outcome on divorce, the court is required to consider incomes, capital and pensions. Section 25 of the Matrimonial Causes Act 1973 specifically requires the court to consider the value of any resource which a spouse will lose as a result of the divorce. This directly relates to the pension of their spouse. It is therefore alarming that so many cases are resolved without the necessary adjustments being made regarding pension values.
In divorce, there are a variety of ways that pensions can be dealt with. The most straightforward is that of pension sharing. This involves part of one spouse’s pension provision being transferred into a pension fund for the other spouse. The amount to be transferred can be calculated either as a simple split of the cash equivalent fund values, or in a way which equalises the income to be received from those funds in retirement. The former is not recommended due to the varied nature of different types of pensions, such an approach could lead to an outcome that is unexpectedly unfair. In particular, the cash equivalent value of the fund which is provided by the pension fund itself could be drastically undervalued when compared to other products available in the open market. Indeed, in one case which I have recently dealt with, the open market value of the fund was calculated by a pension expert at an astonishing 65% higher than the cash equivalent value which had been provided by the pension fund itself.
If we look at equalising incomes on retirement, there would need to be an instruction to a pension expert who would undertake the necessary actuarial calculations and consider the different types of pension funds. A 2020 report by the Pensions Advisory Group recommends that in the vast majority of cases, an outcome that provides equal income on retirement is the fairest and most appropriate way to proceed.
A misconception about pension sharing is that people think that they continue to be financially tied if such an order is made. That is not the case. The receiving spouse will have a pension fund which is entirely separate from that of the transferring spouse. As such, a clean break can be achieved if there is a pension share.
Instead of pension sharing, many of those divorcing choose to offset their claim regarding their spouse’s pension, so that one of them receives more of the other available capital assets. For example, it may be that one party will retain the family home, whilst the other spouse retains their pension funds intact. This can be a huge mistake unless an actuary calculates the appropriate offset amount, and even then, account should be taken of the tax implications and what is termed the utility argument, whereby a lump sum of money you receive now in lieu of pensions may be reduced to reflect the fact that you have the use of those funds immediately rather than waiting for the pension to kick in at some point in the future.
Offset calculations done by an actuary can be very surprising, particularly when you are dealing with defined benefit pension schemes which can be extremely valuable, and it is vital to obtain proper advice before committing to dealing with the pension aspect of the divorce in a particular way.
There is some concern that as getting a divorce has become easier (with the no-fault divorce now the only option in England and Wales), more people will have ‘do-it-yourself’ financial settlements which don’t properly take account of the nature of pensions and how those should be dealt with by divorcing couples.
We at Wendy Hopkins Family Law Practice have the knowledge and the experience needed to guide you through the process in a way which ensures that you can achieve a fair outcome.
Author: Thea Hughes