The importance of pension rights on divorce
For many people, the value of their pension may be higher than that of their house. On divorce, the law dealing with financial provision provides that in the context of dividing the marital assets, the court MUST take the pension into account. It therefore makes it all the more important to protect (and take account of) your rights to the pensions as a source of future income for when you retire.
It is increasingly evident that the role of the State in providing an old age pension is reducing, with no sign of any political will (or the funds) to reverse that trend. Everyone is therefore going to be expected to make provision to look after themselves in retirement and not rely solely on the State to provide a sufficient income in later life.
What happens to a pension at divorce?
The pension is part of your finances whether it belongs to you or your spouse. It MUST be considered in all cases of divorce. There are three ways they can be dealt with:
- Offsetting – The court looks at the couple’s finances. It can compensate a wife for the loss of pension rights – for example, the wife might keep the house and the husband keeps his pension. However, offsetting will depend on what other assets you and your spouse have.
- Sharing order – This was introduced on 1st December 2000. The pension can be shared. For example, the court can order the pension scheme to take some of one spouse’s pension rights away and make them over to the other spouse. The recipient gets their own fund which is separate from the other spouse’s.
- Attachment / earmarking order – This is very rarely used. The court can order the trustees of a scheme to pay part of one spouse’s pension direct to the other; however, the pension remains in the fund member’s name. In this situation the recipient remains dependent on the pension holder. They have to wait for them to retire before they receive an income. It will also stop on the death of either the husband or wife or if the wife gets married again. In comparison to a pension sharing order, dealing with a pension by way of attachment or earmarking does not provide the same level of financial security or certainty.
Pension sharing – what are the benefits?
- A pension sharing order in your favour means you will then have a pension of your own or be able to add to your own existing pension with the credit. It does not therefore mean you are reliant upon your (former) spouse, or be dependent upon them as to when they retire before you receive any income.
- If you place your pension share funds in a totally new scheme, you may well be able to choose when you wish to “retire” and receive an income and/or cash lump sum.
- If you remarry (after this divorce) it will not affect your pension sharing order.
- You can choose whom you want to receive the benefits of your new pension rights in case you die before retirement. If you marry again, your new spouse may therefore be able to receive a widow/er’s benefit on your death.
- After the court order is made, your former spouse cannot go back to court to change the amount of the pension share.
- Your new scheme may allow you to take out a lump sum when you retire. You won’t have to pay tax on this sum. But note that you do have to pay income tax on the monthly income you get from the pension when you retire.
- Once you have started the new pension you can make payments into that scheme and increase the fund yourself, for your own benefit.
When can a pension share take place?
- You have to have started the divorce proceedings after 1st December 2000 – seemingly less relevant these days as most divorces will have been started relatively recently. However in those (few) cases now where no financial claims were resolved or dealt with but proceedings for divorce were issued, check the date the divorce was started.
- Only a court can order the pension share. However where the couple reach agreement, the Court can approve a Consent Order that includes a Pension Sharing Order. There does not have to be a contested hearing or proceedings, but there does have to be a Court Order.
- You can share any proportion of the pension or pensions (1% to 100%).
- The costs of implementing the pension share can also be shared between the parties.
Another very important aspect to consider is that concerning a spouse with pension rights in another jurisdiction. Before you agree to any Pension Sharing order made in the UK, you must make sure that the pension Trustees abroad are prepared to enforce the UK order. At Paradigm Family Law, we have had several clients approach us where their previous solicitor did not address this issue and left them in a situation where the order was not then enforceable abroad. It is vitally important to get foreign legal expert advice at a very early stage and especially if there are ongoing financial proceedings, get that advice before the first court hearing.
If you would like more information on your financial claims on divorce or on any of the other issues raised in this article, please get in touch. You can call us on 0845 6020422 or email us at [email protected] and speak to our family law experts. You can also follow us on twitter here.