Divorce and Pension Sharing Advice Cambridge

Pension sharing is a formal agreement to divide pensions at the time of divorce. The courts work out exact percentages and the receiving party can become a member of the pension scheme or transfer the value to a new pension provider.

Our pensions and home are usually our most valuable assets

Pensions are often the least well understood of the matrimonial assets that get divided due to divorce. There is a real risk of one party losing out on value pension benefits when reaching a settlement. Therefore, obtaining specialist professional financial advice when splitting these assets is essential.

PENSION SHARING

The Welfare Reform and Pensions Act 1999

The Welfare Reform and Pensions Act 1999 introduced pension sharing for petitions issued after 1 December 2000. However, the factors relating to pensions can be very complex, especially if the parties have a combination of final salary (defined benefit) and money purchase (defined contribution) schemes.

Your pension will be included in your financial settlement if you divorce or dissolve a civil partnership. Even when you agree on a settlement, it should be confirmed through a Court Order. If you’re not married, or in a civil partnership, your pension can’t be shared if you simply separate.

Always get legal advice about your pension if you’re divorcing or dissolving your civil partnership. Particularly if you’re planning to remarry and haven’t previously agreed on a financial settlement.

pension agreements

How Courts deal with pensions

When a marriage or civil partnership ends, the Courts deal with the pension arrangements in one of three ways.

1. You’re given a percentage share of your former partner’s pension pot

This is known as pension sharing. The money that you get from the pension pot of your former spouse or civil partner is then legally treated as your money. Pension sharing is designed to provide a clean financial break for the divorcing parties. The parties (or the Court) will decide what aim is to be achieved by pension sharing. For example, a desired outcome may be to equalise pension income on retirement or to equalise the capital value of each party’s pension entitlement. You will also need to decide whether it is appropriate to take into account the whole of the pensions, or just that part built-up between two specific dates.

2. The value of a pension is offset against other assets

This is known as pension offsetting. Offsetting is where an amount of money is calculated, which would be paid out of non-pension assets from one party to the other, that is equivalent to the relevant Pension Shares that would otherwise have been chosen. For example: you keep your pension and your former spouse or civil partner keeps the home.

3. Some of your pension is paid to your former partner

This is known as pension attachment (previously called ‘earmarking’). Attachment Orders are a direction by the Court to the trustees of a pension scheme to pay part or all of the member’s pension benefits to the ex-spouse on retirement or death. This is like a deferred maintenance payment and would cease if the ex-spouse were to remarry. Also, the Order does not transfer ownership or control of the pension benefits to the ex-spouse and their rights may be affected by decisions taken by the scheme member, for example the timing of their retirement.

There is a risk that settlements can be reached without understanding the full range of options and the same applies to the formal dissolution of a civil partnership. Therefore, couples going through divorce should make sure they understand the options, including the advantages and disadvantages of each, before deciding on how to divide pension assets. Ideally, this should happen before any negotiation towards a settlement even takes place not after an Order has been issued by the Court.