In a divorce very often pensions are one of the most valuable if not the most valuable asset that will need to be considered and possibly divided. Pensions come in all shapes and sizes which is where family lawyers rely heavily upon financial advisers to assist clients (and the solicitors!) in understanding pensions especially as very often they will not be straightforward.
A final salary pension is a prized and rare commodity these days although its value can sometimes be regretted by the person with the pension benefits when they have to share it with their ex-husband or ex-wife. The long-term benefits of a good pension are not often fully appreciated by someone having to give up part of those benefits or make a payment in lieu many years before a pension might be payable and that in essence is one of the key issues of dealing with pensions on a divorce.
The starting point is how to value a pension. It is now standard practice to obtain a cash equivalent value or a cash equivalent transfer value, but what do these mean? With a money purchase scheme where there is actual "cash" in the scheme a CETV does "what it says on the tin" but a valuation of a final salary pension is much more nebulous. The actuarial calculations that go into preparing a cash equivalent transfer value in respect of a final salary pension scheme are complex. This can assist those that have such a pension because the CETV provided by a scheme rarely reflects the cost of investing actual cash into a personal money purchase pension necessary to buy the benefits that would be due under the final salary scheme. The trouble is it is as has been quoted by the Courts like comparing "apples with pears".
The Court's powers in dealing with pensions derive from a much amended Section 25 of the Matrimonial Causes Act 1973 as with everything else divorce related. Whilst the Court still has a pretty archaic and rarely used power to award earmarking/attachment (i.e. a payment on retirement) the two common ways of dealing with pensions if there has to be an adjustment is pension sharing or offsetting (a payment of cash or other assets in lieu). Pension sharing has become an attractive and frequently used method as it provides immediate certainty and both parties can keep control of their pension positions post the Pension Sharing Order being implemented. It can be very expensive in terms of pension sharing charges imposed by the pension provider but leaving that aside there is no cost to either spouse save for any charge in taking professional advice on what is proposed.
A recent issue that has been resolved is whether the Courts in this country can make Pension Sharing Orders in relation to foreign pensions. The answer is now clearly stated as no. Foreign pensions are not ignored but they cannot be subjected to Pension Sharing Orders in the same way that a pension can be that is within this country. In the vast majority of cases pensions are within this country but it does happen on occasions that foreign pensions are involved.
At the risk of oversimplifying the situation if an adjustment of pensions is needed either one party will get a "chunk" of the other's pension by a pension credit being transferred into a pension in their name. Alternatively in lieu of that there could be a lump sum payment or a different division of other assets. Historically a popular route has often been that, for example, a person with a pension could keep their pension intact but the husband or wife might then receive more or all of the equity in the family home. It should be more scientific than this but on occasions it is more "art than science" with exact calculations not necessarily being carried through as practical. This can cause clients frustration because of the lack of precision but Courts will often take a "ballpark" or "broad-brush" approach towards any settlement whether it be including pensions or not.
If pensions have to be adjusted decisions have to be made by both the person who has a pension and the one that should be receiving additional provision. It is the juggling exercise between maximising capital now and perhaps having less in retirement or receiving less capital now and starting to develop a better pension "pot". This can be a very difficult decision for a client to make as he or she will need to balance their immediate needs and in particular very often will need to be able to buy a property. Additional capital in lieu of pension could mean not having to get as bigger mortgage or a mortgage at all. It is something of a piric victory for someone to be awarded a Pension Sharing Order with the potential for great benefits when they retire but then struggle to afford to buy the type of property they would want to live in immediately.
Financial advisers and actuaries are becoming increasingly important in trying to assess how to fairly divide pension assets. The Government's recent changes in legislation for pensions in theory makes the situation more flexible in that monies can be raised more quickly albeit possibly with a higher taxation consequence. In practice the new arrangements for pensions have actually complicated the scenario within a divorce without yet too many people using the greater flexibility to raise monies that can be used as part of a divorce settlement. Increasingly this is going to be an issue for those with a pension and those without a pension that are involved in divorce proceedings as very difficult decisions will need to be made. Sadly we still see situations where one party says they do not wish to make a claim over the other's pension or the person with the pension says it is "theirs" and why should they share it with their husband or wife. Whilst those comments are becoming rarer they are still happening and it is scary for family solicitors to see that with all the publicity surrounding pensions people are still underestimating their true worth and how they should be taken into account. In a long marriage it may be that one party alone has been able to build up pension benefits – possibly through that job. That does not make it any less of an asset that needs to be shared at the time of a divorce.
So 'to share or not to share' is not a question whether pensions should be taken into account or not but how pensions should be divided and what is the most appropriate way of doing it - but it may not be a full arithmetical calculation alone.
Commentary by Neale Grearson Head of Family Department.
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