It’s one of the biggest questions for those getting divorced - what happens to my pension? With pensions probably being the largest asset you may have in your marriage or civil partnership, it’s important to understand the best way to deal with that asset in your divorce financial settlement.
First of all, let’s bust one myth. No divorce agreement is a straight 50/50 split regardless as in some US states. Most settlement negotiations start at a point of 50/50, but it’s by no means the usual outcome.
In England and Wales, all the pension you have built up over your lifetime is taken into account, not just the pension accrued while you are married or in your civil partnership. This doesn’t include your basic State Pension, but may include other State Pensions (more on this later).
Financial settlements require full disclosure, a full and accurate declaration of all your assets and their value. This is particularly tricky with pensions, as the value at the time of divorce may not be the true value on retirement. So, there are various ways pensions can be valued, including:
Cash Equivalent (CE)
This is the most common method, which gives a ’snapshot’ value of your pension in terms of the cash sum your pension scheme would need to pay out to discharge their obligation to pay you an income in retirement. However, these CE values are often wildly inaccurate and it would also cost more to try and buy the equivalent benefits from another provider, So, make sure you explore other options.
Most divorce courts prefer this option, whereby one partner can secure rights to a percentage of their ex-spouse’s, which is put into their name. This pension is then separate from yours, so you can both decide when you want to retire, and how you want to manage your pension. There’s no cash payment involved. If you or your spouse are already retired, pension share can be delayed by a deferment order so the pension is only shared when your ex also retires.
As the name suggests, the pension holder keeps their pension fund intact and untouched, and the value is offset by giving the other partner a greater share of other assets such as cash, or a larger share of the family home. The issue with this method is that pension are not liquid assets and are only accessible on retirement, when the pension may be worth considerably more than at the time of divorce.
A court can award a percentage of up to 100% of the income from one partner’s pension to the other. However, if the pension holder dies or the other partner remarries, the income stops.
Deferred lump sum order
Again, does what it says on the tin. Your pension remains untouched, on the understanding that both of you will receive an agreed lump sum at the time of the pension holder’s retirement.
Pension attachment order
A court order that sets down a portion of the pension, either as a lump sum or as income, what will be paid to the other party when the pension holder retires. The disadvantage is that if you are not the pension holder, you are dependent on when your ex wants to retire,. So there is no ‘clean break’ from your spouse after divorce, not what many people want to happen.
Your basic State Pension cannot be shared if you divorce, BUT you may have to share any extra pension. With a ‘pension sharing order’ issued by a court, you or your ex- partner may have to share any extra State Pension entitlement you’ve built up, including any additional State Pension or any protected payment.
Getting a fair deal for your pension
As you can see, calculating the value of your pension is a complicated process, and choosing the right option for you is important. As part of your divorce, you should make sure you get professional advice from a financial advisor or pensions actuary to ensure you have a robust and reliable valuation. Then you can quantify your pensions alongside your savings, shares, investments and any property of business interest you may have. Your legal team can then help you reach a financial settlement that is based on a professional valuation, and with full disclosure.
Call us to book an appointment to discuss your pension and other assets in your divorce. We can help you make informed decisions at a time when emotions can run high, and keep you focused on getting the best result for you, your family, and your future,.
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