Pensions – Consider the future rather than just the present
The Guide to the Treatment of Pensions on Divorce has recently been published by the Pension Advisory Group (PAG) to set out a uniformed approach to dealing with pensions on divorce across the profession. It emphasises that pension assets should be considered and evaluated at the earliest stage possible when parties divorce.
When considering how to approach pensions within divorce parties have three options: –
- Pension Sharing- This enables a pension pot to be shared/split. Pension sharing does not automatically mean an equal 50% division as it can be any percentage between 1% and 100%. If a pension sharing order is made, the receiving spouse will have a new pension which will benefit them regardless of their spouse’s death or retirement date.
- Pension Attachment – this is used less frequently after the introduction of pension sharing. The court can order the pension scheme to pay the receiving spouse on their spouse’s retirement a percentage of the pension lump sum and/or a percentage of the monthly pension. There are, however, several problems associated with pension attachment. In the event the paying spouse dies before retirement, the receiving spouse will receive no widow’s pension and the benefit of an attachment order will be lost unless it has been made against any death benefits.
- Offsetting – the parties’ value the pensions involved and decide if the spouse without significant pensions should receive a balancing capital payment from another source, e.g. the family home. It is often the case that the value of the off-set is discounted to reflect various factors, for example, that payment is received immediately, that the payment will not be subject to taxation and that it is free of risk. It is only possible to proceed by way of off-setting where there is sufficient capital available.
Offsetting is the most common type of method of settling financial remedies. More often than not one party will value the family home above all else, perhaps to their detriment overlook their spouses’ pension to retain the house.
In some cases, the parties do not have enough equity in the family home to consider a sufficient pension/capital trade-off, which makes it impossible to ignore pension assets which are often the largest matrimonial asset.
As a rule, pensions fall into two categories: defined contribution schemes (DC) and defined benefit schemes (DB). Where there is a sizeable DB scheme PAG advise that parties should always obtain expert advice from an actuary because the cash equivalent transfer value is rarely an accurate valuation due to different multipliers.
Parties are often be put off by the cost of an Actuary’s report – typically £1,500 to £2,500 plus VAT but this initial outlay (which is shared between the parties) could save thousands in the long run. Put simply, an actuary should always be involved with the calculations of offsetting, particularly with DB schemes to achieve fairness between the parties.
We also strongly encourage parties to be aware of the potential income they may lose rather than just focus on the here and now. If you or your partner would like further information and advice with regard to your pension, please do not hesitate to get in touch.