Pensions on divorce
When a couple has decided to divorce and are working out what needs to be split between them, the focus is usually on the obvious things of value – their house, cars, bank accounts, investments, etc. It is easy to overlook one of the most valuable assets though – the value in work-related or private pension schemes. These can be very difficult to put an accurate valuation on because they often cannot be turned into an asset or income you can actually have in your hands until many years in the future. Yet, they are often worth much more than people think.
The most straightforward scenario is where the couple have been contributing to their own pension schemes throughout their marriage, have both continued working full time, and have been earning similar salaries. However, things are rarely that simple. It might be the case that one of you is on a higher salary than the other. More often, one person will have taken a career break for a time to bring up children, or gone down to part-time working. The reduced income coming into the household during this time is very noticeable, but what is less obvious is that they will have not been building up their private pension entitlement during this time.
This article will explain how the value of pension funds should be taken into account when deciding a fair financial split of all assets.
How can we put a value on our pension funds?
The first thing to do is to get an official valuation of the pension funds. This is provided by administrators of the pension schemes, who will produce a Cash Equivalent figure – sometimes known as a Cash Equivalent Transfer Value (CETV). Pension providers have to provide one cash equivalent valuation figure a year free of charge, unless the pension is already being paid out.
Even though this value is called a Cash Equivalent Value, it is not an amount that can immediately be turned into cash. It has to stay invested until it is used to pay out an income when you retire. What can be done, though, is for part of the value to be transferred into a pension scheme – either an existing one or a new one – in the other person’s name.
How much pension will I need when I eventually retire?
Part of the discussions a divorcing couple need to have about their finances are around what each party’s earnings potential will be. For example, the person who has stayed at home to look after the children might intend to return to work as the children grow older. After a few years, they might intend to be working full time, and this can give an indication of the size of pension pot they might be able to expect to build up. This sort of calculation needs expert financial advice.
This will give an indication not only of how much maintenance they might need until they are able to be self-sufficient while they are working, but also how much of a “shortfall” in their pension provision might need to be compensated for.
There is no hard and fast rule to follow. Each situation is individual and unique.
What options do we have to divide the pension values?
There are three ways of achieving the split of pension once the amount or proportion of the Cash Equivalent value has been agreed.
Pension Sharing Order. This is the most usual way. The pension company will transfer the amount of the Cash Equivalent value agreed into a scheme in the other person’s name. This might be a brand-new scheme or an existing pension fund.
Pension Offsetting. This is where the pension value is lumped in with other assets. Typically, it might mean that one person gets a much larger share of the tangible assets – e.g., they get to keep the house – and get the benefit of the value immediately, whilst the person who has the pension fund gets to keep all of that and benefit from it in the future.
Pension Attachment Order. This means that the pension fund is only dealt with when it is due to be paid. A stated proportion of the monthly income – and possibly a proportion of the cash lump sum – is paid to the other person from when the owner of the pension is entitled to take the value out of the fund when they retire. This might sometimes be more appropriate when the divorce happens relatively close to the time when the pension can be taken.
Pension splitting only applies to private or company pension schemes, not to the state retirement pension.
Conclusion
The amounts locked into pension funds are often a significant but hidden part of the assets couples need to divide between them when they divorce. These are always difficult discussions to have, and mediation is often a very effective and cost-efficient way you can come to a fair settlement.
Once you have agreed how you will split your pension funds, you need to turn the agreement you have made through mediation into a court order. The pension fund administrators will not be able to make any adjustments to the pension funds until they have this order. However, once you have both agreed what you want to do, getting the court order is a relatively straightforward and inexpensive process.
Nevertheless, as well as the support you will get from your mediator, you should both get independent legal and financial advice during the process.
Talk to one of our friendly and experienced team on 0113 468 9593 to find out how we can help you.
Frequently Asked Questions
There’s enough to think about already; do we really need to think about pensions as well when we are divorcing?
Absolutely! Many people don’t realise their pension funds have a value as such. They are often the biggest assets a divorcing couple own after the value of any house they own.
How much is a pension ‘worth’ if we can’t get hold of it now?
It is true that the value locked into a pension fund can’t usually be turned into cash straight away unless you are divorcing later in life around the time you would be eligible to start drawing it. Your pension fund administrators will be able to calculate a value of the fund. Part of this value can be switched into a pension fund in the other person’s name for them to benefit from when they reach retirement age.
How can we split the pensions?
There are three ways of splitting a pension fund. You can have a Pension Splitting Order, where part of the fund is split out into a separate fund for the other person, or you can offset the value against other assets, so one person gets a bigger proportion of the immediate cash assets and the other gets more of the value of the pension for their retirement, or you can split the benefits of the pension fund when it becomes payable, so you each get a specified proportion of the income it produces.
Do we have to split our state pensions as well?
No. Pension splitting does not apply to your state pension entitlement, only to private pension plans.
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