Pensions  

How to split the pension on divorce

  • Identify the challenges of splitting pension under divorce proceedings
  • Describe the different ways pensions can be treated in the financial settlement
  • Highlight some of the pitfalls to be avoided in this process
CPD
Approx.30min
How to split the pension on divorce

It is twenty years since the family courts in England and Wales were given the power to share pensions on divorce (Welfare Reform and Pensions Act 1999).

This is a unique power, and is the only circumstance in which a living individual can transfer all or part of their pension fund to another individual.

When a divorcing couple apply to the court to resolve the financial aspects of their divorce, the court has the power to make a wide range of orders, for sale or transfer of property, for payment of lump sums and regular monthly maintenance.

In appropriate cases, the court can make a Pension Sharing Order (PSO). Such an order may be imposed by the court following contested proceedings, but more usually it will form part of an order made by consent following a settlement negotiated by the parties with the assistance of lawyers or a mediator.

A PSO is an order directed to the trustees of a pension, requiring them to transfer all or part of the pension fund to the holder's ex-spouse.

Together with the order, the trustees will be served with a Pension Sharing Annex, containing specific instructions, including the percentage of the value of the fund which may be transferred. It is possible for PSOs to be made against more than one pension, in different proportions.

It is fair to say that pension sharing is one of the less well-understood aspects of matrimonial financial practice.

In a most welcome development, Sir James Munby, the former President of the Family Division, convened an inter-disciplinary working party to investigate how pension sharing works in practice in the family courts, to highlight difficulties, and to make recommendations to improve inter-disciplinary working, the Pension Advisory Group (PAG).

The PAG's report, "A Guide to the Treatment of Pensions on Divorce" was published in July 2019.

Valuation

The universal valuation method for pensions is the Cash Equivalent (CE). A divorcing couple will inevitably be required to obtain CEs for each pension scheme of which they are or have been a member. A PSO will be expressed as requiring the trustees to transfer a proportion of the CE value to the other spouse.

The advantage of CEs is that they are easily obtainable, and provide an approximate "snapshot" value of a pension fund.

The difficulty is that the CE can provide a wildly inaccurate valuation, in some circumstances.

The CE, which will be calculated by the trustees of each scheme in accordance with their own rules, is a calculation of the cash sum that the scheme will pay to discharge their obligation to pay income in retirement.

The value of the pension benefits to the individual member may be very different, and it may cost far more to purchase equivalent benefits on the open market.

This can be important in a divorce context, where using only CEs can produce unfair outcomes.

CPD
Approx.30min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. A pension sharing order can be imposed by the courts following divorce proceedings, true or false?

  2. What is the problem with using cash equivalents in assessing the value of a pension?

  3. What is pension offsetting?

  4. What is the largest source of negligence claims against family lawyers?

  5. What impact has the reduction in the annual allowance had in divorce cases?

  6. It is very easy to trigger the Money Purchase Annual Allowance in these proceedings, true or false?

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  • Identify the challenges of splitting pension under divorce proceedings
  • Describe the different ways pensions can be treated in the financial settlement
  • Highlight some of the pitfalls to be avoided in this process

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