PensionsJan 3 2023

Do not neglect pensions in divorce settlements

  • Describe the issues with pension sharing on divorce
  • Explain when an Pode is required
  • Explain how pensions are distributed on divorce
  • Describe the issues with pension sharing on divorce
  • Explain when an Pode is required
  • Explain how pensions are distributed on divorce
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Do not neglect pensions in divorce settlements
Photo: Karolina Grabowska/Pexels

In the case of a needs-based claim, generally the timing and source of pension savings are not relevant factors to how the pension assets are split – this will focus more readily on the needs of the parties and proportion of pensions required to fulfil those needs.

In the case of sharing claims, questions as to matrimonial and non-matrimonial contributions to pensions will be more relevant and must often be considered. 

In either case, sharing or needs, it is therefore fundamental to ensure pensions are accurately considered and valued at an early stage.

Valuing pension assets

To make sure a party is receiving a split of assets that is fair and takes into account the full pension provisions of each party, it is extremely important to ensure comprehensive information is gathered in respect of both parties’ pensions prior to entering negotiations or proposing/accepting offers that include pension sharing elements. 

Information gathering should be conducted at an early stage, in respect of both private and state pension funds.

Pension gathering information can be undertaken even prior to issuing any proceedings by obtaining cash equivalent valuations of each pension and providing information obtained from pension providers.

Form P should be used in the case of non-state pensions to obtain the necessary information in respect of pensions held, and Form BR19 and BR20 in the case of state benefits. 

Each party will need to provide up-to-date CE values of each pension they hold and confirm the type of pension held (either DB or defined contribution schemes).

The forms listed above provide helpful checklists of complicating factors that parties must consider, and establish whether these apply in respect of their own pensions, before moving on to consider proposals for pension sharing. 

Once details are obtained from each party in respect of types of pension, values and the parties’ overall financial position, consideration will need to be given as to whether a pension on divorce expert (known colloquially as a ‘Pode’) is required. 

The Pension Advisory Group report provides helpful guidance on when a Pode may/should be required to assist the parties in further valuations of pensions and computations for income and capital-based pension sharing arrangements or indeed offsetting of non-pension assets as an alternative to pension sharing.

Examples where this may be necessary in particular include where one or both parties hold DB schemes in respect of uniformed service public sectors for example (such as the armed forces or police), when the parties’ ages differ significantly, when pensions come into payment at different dates and when pensions have ancillary benefits which may be lost upon sharing, such as a widow’s pension.  

Other points to note

Parties should also consider whether, in addition to legal advice, financial advice on the implications of pension sharing agreements should be taken to ensure tax implications and any other complicating factors are fully considered prior to agreement being reached.  

One commonly arising ‘bear trap’ is the lifetime allowance. This is often overlooked and can cause unnecessary difficulties, particularly when pensions are either under-shared or not shared at all.

Very often, LTA tax can be mitigated or even saved entirely by a canny pension sharing order – although the usual health warning applies of not letting the tax tail wave the fair outcome dog.

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