What Happens To My Pension In A Divorce?
If you are in your early forties, you can expect to have another thirty-eight or so years left on this wonderful planet of ours. However, depending on your lifestyle, genetics, and luck, some of these years may not be spent in the best of health. Which means you may not have the luxury of always being able to earn an income. Also, for many, retirement is a golden-era that has been carefully planned for. The time in your life when you are free to do as you wish, having thrown off the shackles of employment. For both these situations, a good pension is incredibly important.
Whatever plans you have; divorce can throw them asunder. And these days, the most contested elements of a financial settlement after property are pensions.
All generations following the Baby Boomers have lived with the knowledge that receiving a State pension is not guaranteed. And it should be pointed out that State pensions are a modern phenomena, introduced by the Old Age Pensions Act 1908. Before this, with the average life expectancy being limited to early 40s in the 1850s, rising to 50 only by 1901, people either worked all their (short) lives or if they lived beyond the age of employment either moved in with relatives or went to the dreaded workhouse.
Today, we take for granted we will live past ‘retirement’ age, and few of us have any illusions that the government will take care of anyone apart from those who would be destitute if not supported. Therefore, many people have poured money into company and private pensions for years, building up a substantial fund.
So, how is this precious ‘pot of gold’ managed in a divorce?
The older you are, the more urgent the issue of pensions is
When working out a Financial Order the Court must consider the factors listed under section 25 of the Matrimonial Causes Act 1973. When it comes to pensions, one of the crucial considerations is the parties’ ages at the time of divorce.
A person in their 20s or 30s still has many years of working life with which to plan and save for their retirement. Also, the amount accrued in any one pension is likely to be minimal. But with the rise of Silver Splitters, those divorcing after 60, the situation is very different. Not only are pensions likely to be of significant value, but each spouse also has less time to recoup any losses.
Therefore, it is crucial to get advice from your Solicitor about the best way to split any pensions which are deemed to be matrimonial property. In England and Wales, divorcing couples are encouraged to work out financial settlements between themselves and engage in round-table negotiation or mediation to resolve any disputes. Your Solicitor will work with section 25 in mind when advising you, ensuring your best interests are protected.
Are all pensions sharable?
Most pensions can be shared, including:
- Private workplace pensions
- Additional state pension and the protected payment element of the transitional rate of the new state pension
- Pension protection fund compensation
State pensions are not sharable in a divorce.
If you or your spouse have an overseas pension, it may be that this is only sharable if evidence can be provided that the overseas jurisdiction will implement and enforce a Pension Sharing Order made by an English court.
How are pensions divided upon divorce?
Pensions are usually divided three ways in a financial settlement:
- Off-setting – where the entire pension is awarded to one party and its value is offset by other assets such as the family home which is given to the other spouse.
- Pension sharing – this is where one spouse is given a share of the other’s pension pot.
- Earmarking – a portion of a pension received by one party is paid to their former spouse, similar to periodic maintenance payments.
What is a Pension Sharing Order?
A Pension Sharing Order divides the rights to the proceeds of a pension between two people, so each has individual rights to the pension scheme.
To ensure fair division, your Solicitor will work with an accountant or valuer to ensure an accurate valuation of all pensions is obtained. This is a complex process and involves the preparation of a Pension Sharing Report.
In summary
Pensions are a crucial aspect of a divorce financial settlement, and the older and wealthier you are, the more critical it is to receive expert legal advice.