The pension awareness week campaign (running from the week commencing 9 September) highlights the importance of pension savings: Home – Pension Awareness Day.
Pensions – a financial asset
In a divorce, all financial assets are taken into account and this includes pension assets. However, pensions are a distinct category of asset which must be looked at separately to other assets such as property, savings and investments. That is because schemes vary widely and £1 in a bank account is rarely equal to £1 in a pension. Defined benefit schemes (such as public sector schemes) are particularly complex with the underlying benefits often being more valuable in reality than the cash equivalent value placed upon them.
Cash equivalent valuations will need to be obtained and exchanged with your spouse at the outset so that you know what pensions schemes you each have and what they are worth.
Pensions on divorce
It is important to remember that pensions can be shared on divorce just like any other asset and the starting point is that there should be an equal division, with a view to you and your spouse being able to each walk away from the marriage with equal pension assets.
That is usually achieved by way of a pension sharing order, where a specified percentage of one spouse pension(s) will be transferred with the other spouse so that they will end up with either a pension in the same scheme or pension credit which they can invest into a different pension of their choice. Some pension schemes only permit internal transfers, others do not.
However, pension sharing orders are not the only settlement structure available in relation to pensions. It is also possible for pensions to be offset, where the spouse with the pension claim receives more capital and no pension sharing.
Such calculations will usually always require expert evidence to be obtained, as they are not straight forward, particularly where defined benefit schemes are involved and offsetting is proposed as a potential solution – in such situations simply dividing pension assets on the basis of their capital values would not necessarily result in a fair outcome and could have unintended consequences.
Do not overlook your pensions
In summary, pensions are often one of the most valuable assets to be divided on divorce and whilst for a lot of people it will be the last asset on their mind, with most being more concerned with having enough cash in the immediate future to buy a house for themselves, for example. However, pensions must not be forgotten about as properly factoring pension assets into a financial settlement will be one of the key components to ensuring a settlement is fair. Whilst often a future considerations, the law is clear that it would not be fair if on retirement one spouse has significantly less income than the other because there was no pension sharing, after a long marriage where the spouse with less valuable or no pension assets did not work for some reason (often because they will have stayed at home and looked after children, for example).
If you have any questions, please get in touch with one of our Family team.