In many divorces pensions are one of the most valuable assets, often second only to the former matrimonial home. It is therefore essential to know how they are dealt with on divorce.
But all too often those going through divorce do not appreciate their entitlement when it comes to pensions, with the result that they receive less than they should, or even that pensions are overlooked entirely (one recent study suggested that only 12% of respondents took them into consideration when dividing assets).
One reason for this can be that for many people retirement can seem a long way off – they are naturally more concerned with their immediate financial needs.
Another part of the problem is that pensions are quite different from other types of assets, which have a clear value that can be easily realised, for example by selling the asset. Pensions are shrouded in mystery, and many people simply do not understand how to approach the issue of their pension entitlement.
The question of valuation
Before any decision can be made as to what should be done with a pension on divorce the pension must be valued.
The most common way in which a pension is valued is by getting a ‘cash equivalent transfer value’, or CETV for short, from the pension provider.
The CETV gives an indication of how much could be transferred out of the pension into another pension fund, which can be particularly useful when considering a pension sharing order (see below).
But a CETV doesn’t always tell the whole story. The way in which it is calculated means that sometimes the pension is actually worth more than the CETV. In such situations it may be necessary to obtain a valuation from a pension expert.
Three ways to deal with pensions
So you have a valuation of your spouse’s pension. What happens next?
There are essentially three ways in which pensions can be dealt with on divorce: offsetting, a pension attachment order, or a pension sharing order.
Offsetting involves the pension-owning spouse retaining the pension, and the other spouse having a greater share of other assets, by way of compensation. Offsetting is perhaps the simplest way of dealing with pensions, and is quite common.
However, there is a serious difficulty with offsetting, in that the value of a pension is not necessarily comparable to the value of another assets, such as the matrimonial home. How does one compare the value of something that can be realised immediately with the value of something from which there might be no benefit for many years? All too often the spouse without the pension may be tempted by offsetting, only to later finding themselves struggling to manage in retirement.
A pension attachment order is an order stating that one party will receive part of the other party’s pension, when the other party receives it. Pension attachment orders can be quite uncertain (how do you know when the other party will take their pension?), and are therefore comparatively rare.
The final option is the most common, and perhaps the most satisfactory: the pension sharing order. This is an order transferring all or part of one party’s pension into a pension belonging to the other party. If it relates to a public sector pension scheme the transfer is usually internal, i.e. the receiving party accrues rights in the same scheme, and where it relates to a private pension the transfer is usually external, i.e. to a different scheme.
Note that a pension sharing order does not transfer money direct to the receiving spouse, but rather into their pension. The recipient may therefore need to seek financial advice about exactly where the transfer should go.
How Prince Family Law can help?
Dealing with pensions on divorce can be quite complex, and anyone seeking a share of their spouse’s pension should definitely seek the advice from one of our highly experienced family lawyers.