Pensions on Divorce
When a marriage breaks down, it is important that the parties sort out their financial affairs as soon as possible. However, this can be complicated and difficult. It is tempting to just agree to split the assets and go your separate ways, thereby avoiding ‘expensive’ legal costs. However, this can be a false economy.
If a proper agreement is not reached following a separation or divorce, the financial claims which arise (for maintenance, lump sums, property and pension orders) are not dismissed until the court has made an order relating to them. As the law stands, such an order can only be made following divorce or dissolution proceedings. Any other type of agreement or arrangement is not binding on the court (although if entered into properly by way of a written agreement with the benefit of proper disclosure and legal advice a Separation Agreement can be highly influential).
The claims do not go away even after the parties have been divorced or separated for many years. The court is able to take account of the parties assets at the time the application is made and is not restricted to the assets as they were at the time of the divorce or separation, which means that if your circumstances have improved, or your ex’s circumstances have become worse, the court could make you pay more than if you had sorted the finances out at the time of the divorce. In addition, an ex-spouse can claim against your estate on death if the claims have not been dismissed as part of a court order.
The only way you can be sure that your ex-spouse cannot make a claim against you is to get an order from the court dismissing the claims.
Pensions are often an asset which can be overlooked. They can sometimes have a value greater than any of the other assets in the case. It is tempting to simply ignore the pensions as they have often been built up before the marriage or the benefit is not likely to be seen for many years. However, it would be a mistake to write off the pensions as their value can substantially affect the way in which the court deals with other assets. The pension values should always be asked for before any settlement terms are discussed, and in some cases the pension benefits payable on retirement should also be asked for.
In the case of defined contribution pensions (ie personal pension schemes) the issue is often one of dividing the pension funds to provide equality. However, if you are close to retirement or already receving a retirement income, the issue may be equality of pension incomes as the funds can produce different incomes for different individuals.
With defined benefit schemes (eg occupational pensions and final salary schemes) the position is much more complicated and often expert advice is recommended.
The new Pension Freedoms that were introduced in 2016 mean that it is possible to access some pension funds when you reach 55, but this does not apply to all pensions and there are tax implications which need to be taken into account.
The court has various ways of dealing with pensions. The most frequently used are Pension Sharing and Offsetting. Pension sharing is where the court transfers part of one spouse’s pension fund to the other spouse. However, the amount of pension share which is appropriate can vary depending on how the pension funds and retirement benefits have been calculated. Offsetting is where a court awards one party a bigger share of the realisable capital to meet their immediate financial needs and leaves the other party’s pensions largely untouched. This approach can also present challenges as there is no set method of calculating the value of the offset amount, and it is generally accepted that pensions and capital assets are not, pound for pound, worth the same.
Finally, it may be important to consider the value of the pension rights in light of the whole of the relationship. This might depend on the amount and nature of the parties’ other assets or whether some or all of the pensions were acquired pre-relationship or post-separation. This is something your family lawyer will be able to help with. They have connections with financial advisers and pensions advisers, accountants and valuers who can assist in helping you make a decision about whether or not to pursue claims and what you could be entitled to, or advise you about whether a proposal to settle is reasonable or not.
If you would like to speak to someone in confidence about any of the issues raised in this article, please do not hesitate to contact us and make an appointment to speak with our experienced family lawyer, Andrew Hill on 01539 723757.