In Focus: When Clients' Plans Change  

How to prepare pension clients for divorce day

  • To be able to explain the different ways of pension sharing
  • To understand some of the legal changes in recent years
  • To learn different ways of assessing clients' needs in divorce
CPD
Approx.30min

The courts can make income or capital orders for financial provision. Income orders cover periodical payments orders which provide for ongoing maintenance.  

Though less favoured these days the courts can and do make maintenance orders that are payable for the parties’ joint lives. Recent years, however, have seen a move towards more fixed or extendable ‘term’ maintenance orders for a defined period.

However, unlike in other jurisdictions, in England and Wales there are no set time limits for which maintenance is payable, with terms dependent on the facts of each case.

In terms of capital orders, the court can order one party to pay to the other a lump sum. Additionally, there are property adjustment orders that include transfers of ownership and orders for sale and the distribution of proceeds between the parties in such proportion as the court sees fit.  

Pensions

The court also has powers regarding the redistribution of pensions on divorce. The importance of pensions on divorce cannot be overstated. Pensions provide security on retirement, and they are often a person’s most valuable asset.

It is essential, therefore, that they are handled appropriately and expert pensions advice sought where relevant.

Since its enactment the Matrimonial Causes Act 1973 has been subject to three main amendments that have radically changed the outcome for pensions on divorce. There are presently three possible ways that pensions rights can be handled on divorce, namely:

  • The traditional practice of pension off-setting.
  • Pension attachment orders.
  • Pension sharing orders.

Off-setting

Before the courts were granted the power to make orders specifically dealing with the parties’ pension arrangements, pension rights were at best afforded a passing acknowledgement as one of the “circumstances of the case” under the Matrimonial Causes Act 1973, and at worst completely ignored despite their potential value.  

All the courts could do was to allocate one spouse (normally a wife) a proportion of the matrimonial assets equivalent to the approximate value of the pension benefits lost on divorce.

This meant there was a trade-off between pension rights and other matrimonial assets, with one spouse typically retaining a greater share of the equity in the home, in lieu of a notional share of equivalent value in the other spouse’s pension.

This practice is known as pension off-setting, and despite the introduction of new pension legislation, it still takes place to this day. 

It is easy to see the attractiveness of this approach, and its practicality: if it is what both parties want, then it may make a settlement that much more feasible. It may allow one party to retain a property instead of pension, which is often a primary consideration where one party who works has a mortgage capacity and the other may not.

However, if one spouse is giving up an entitlement to the other’s pension, it is crucial that they understand the value of what they are sacrificing and the possible pitfalls.