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Pensions and divorce

Pensions And Divorce: Am I Being Treated Fairly? What Are My Rights?29th Sep 2021

by Lindsey Arnold on 29th Sep 2021

Contact Lindsey Arnold

If I Divorce, Am I Entitled To A Share Of My Former Partner’s Pension?

Pension sharing on divorce has been around since the year 2000 – and yet still only happens in just 12% of cases.

After the family home, pensions are often the most valuable assets that people have. You’d be stunned how much a pension can be worth. In some cases they can be worth more than a property.

Pensions may appear boring and complex but never underestimate their value in a divorce settlement – especially if your former partner has a very generous police, armed forces or civil service pension.

And you could well be entitled to a share. But don’t forget…they could be entitled to a share of your pension too…

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How Are Pensions Divided Up In A Divorce?

Courts have the power to redistribute pensions benefits in financial remedy proceedings for:

Financial remedy proceedings are used to settle money/property disputes between divorcing couples that have not been able to resolve them using mediation.

There are various ways that the value of pensions can be divided between couples splitting up:

  • Offsetting – where one party can take a greater share of other assets to compensate for the pension rights retained by the other party.
  • Earmarking Order – pensions and lump sum benefits can be earmarked for payment to the former spouse.
  • Pension Sharing Order – the pension fund of the plan holder is split; part of the fund is transferred to a separate arrangement in the ex-spouse’s name. This method provides a clean break because the pension assets are split immediately; each person can decide what to do with their share. The former spouse no longer depends on the pension plan holder for the timing of the payment of pension benefits (and their entitlement is not affected by subsequent remarriage).
  • Pension Attachment – an order that compels the pension provider to pay a share of the benefits directly to the former partner.

Pension Sharing – How Does It Work?

Pension sharing must be formalised by a Pension Sharing Order from the court. The order must state the percentage of the pension rights to be shared.
It is available in divorce, nullity or dissolution cases (but not for judicial separation). The process operates on the basis of:

  • pension debits – the person with pension rights loses a percentage of their fund’s value
  • pension credits – the ex-spouse/civil partner receives the percentage transferred and gains pension entitlement in their own right.

Can I Appeal A Pension Sharing Order? Can It Be Varied?

A Pension Sharing Order can be varied under the Matrimonial Causes Act 1973 – provided that the decree of divorce or dissolution has not been made absolute (ie, the order has not taken effect). But a Pension Sharing Order cannot be varied once the decree has been made absolute. In limited circumstances, it is possible to appeal a Pension Sharing Order.

Pension Attachment Orders

Under this method, the pension provider has to pay a share of the fund/benefits directly to the person claiming a share. You don’t get the money from your ex – you get it directly from their pension provider. The money could be in the form of:

  • pension income and/or
  • an immediate lump sum and/or
  • death benefits.

A Pension Attachment Order made by the court can take effect immediately – or it can be deferred. This depends on whether or not the person with pension rights has retired or not.

Pension Attachment Orders are available only where the proceedings for divorce, nullity, judicial separation or dissolution are filed on or after 1 July 1996. (Yes, unlike Pension Sharing Orders, Pension Attachment Orders are available for cases of judicial separation!)

How Much Is My Former Partner’s Pension Worth?

Getting an accurate valuation of your former partner’s pension is crucial. You don’t want to end up short-changed. The Pension Sharing (Implementation and Discharge of Liability) Regulations 2000 govern the calculation and verification of a pension’s:

  • cash equivalent (CE) value
  • cash equivalent benefits (CEB) – which reflects the capital value of the pension benefits (ie, the income and /or potential lump sum) that have been accrued to date, or which are in payment.

One must also consider the cash equivalent transfer value (CETV). With a money purchase pension scheme, the CETV is purely the transfer value of the funds that have accrued to date.

Value Of Public Sector Pension Plans

Public sector pensions are occupational schemes for employees of:

  • central or local government
  • nationalised industries
  • other statutory bodies.

They include pensions for the armed forces, police, firefighters, civil service, teachers, local government and the NHS.

In the past, these state-backed pensions had the reputation of being very generous. However, as people now live longer, most public sector pension schemes are now underfunded. Most run at a deficit; the Treasury meets the shortfall.

Furthermore, the normal pension age in public sector schemes is often lower than in private sector schemes. So it is important to understand the benefits provided under the scheme rules (and that the cash equivalent valuation has limitations).

Don’t Forget The State Pension

It’s easy to overlook the basic state pension because it’s so low – especially when compared with more generous schemes in the Netherlands, Denmark and Finland.

But that’s no reason to overlook it when resolving finances in divorce. One should always include state pension in the financial disclosure process.

What If My Former Partner’s Pension Scheme Is In Trouble?

The Pension Protection Fund (PPF) was set up by the Pensions Act 2004 as a statutory fund to compensate members of occupational pension schemes where:

  • the employer has become insolvent
  • there is not enough money in the pension scheme to pay its members when they retire.

If the pension scheme qualifies, the amount of compensation depends on whether the plan holder had passed their normal pension age when their employer became insolvent. (Anyone receiving survivor’s pensions – such as widow’s, widower’s, children’s, civil partner’s pensions – will also normally qualify for 100% of the pension income.)

People over normal pension age (or who started drawing their pension early due to ill-health) will receive a full PPF pension. 

Those under normal pension age receive a pension of 90% of the amount built up when their employer became insolvent. There is also an upper cap set by the government. The cap from 1 April 2021 up to and including 31 March 2022 for a 65-year-old is £41,461.07.

Any compensation paid will be increased in line with legislation and not with the former scheme rules.

Increases in PPF compensation are limited to benefits built up from 6 April 1997 only. Payments are ‘in line with inflation’ but capped at a maximum of 2.5%. That may be lower than the current rate of inflation – as was the case when this blog post was first published.

What Happens If I Remarry Or Enter A New Civil Partnership?

Pension Attachment Orders are classified by the law as financial provision orders. So under the Matrimonial Causes Act 1973, you can’t apply for one if you have remarried.

But you can apply for a Pension Attachment Order if you do so before you remarry or enter a civil partnership.

Pension Sharing Orders are not included in the Matrimonial Causes Act 1973. So you can apply for one after remarriage/civil partnership.

What Happens If My Former Partner Dies?

Death has no effect on an implemented Pension Sharing Order.

But with a Pension Attachment Order, periodical payments will cease if:

  • the paying spouse or civil partner dies in retirement
  • the spouse or civil partner receiving payment dies.

What If My Former Partner Goes Bankrupt?

When a Bankruptcy Order is made, control of the individual’s estate is vested in the trustee in bankruptcy or the Official Receiver.

Following the introduction of the Welfare Reform and Pensions Act 1999, a person’s rights under a pension scheme can no longer be forfeited due to his/her bankruptcy. Basic state pension (and state second pension) rights do not form part of the bankruptcy estate. The same is generally true for some statutory public sector pension schemes.

If a pension is an approved arrangement, it is excluded from the bankrupt’s estate. But a bankruptcy trustee may still request information about a bankrupt’s pension arrangements to see whether they are excluded. The 1999 Act also gives trustees the power to recover excessive pension contributions.

Valuing a Pension For Divorce Purposes

Valuing a pension for divorce calls for specialist financial expertise. You will often need a Pensions on Divorce Expert (PODE). This person could be an:

  • actuary regulated by the Institute and Faculty of Actuaries (IFoA)
  • independent financial adviser (IFA) regulated by the Financial Conduct Authority (FCA).

Unregulated financial experts are also available but we recommend using regulated professionals. They should have advanced level pension qualifications, be a specialist in pensions and divorce, be accredited to Resolution (the association of family lawyers and other professionals).

Pension reports from PODEs are usually needed when:

  • the pension’s defined benefits are likely to exceed £100,000
  • the person has a mix of defined benefits and defined contribution pension schemes
  • the defined contributions come with a guaranteed minimum pension or annuity rate
  • there is a large age gap between the two people in the relationship.

Gap Between Men’s And Women’s Pensions

There is currently a significant gap between the pension wealth of men and women, research by the Pensions Policy Institute revealed in September 2021.

Men aged between 65 and 69 have six times the pension wealth of their female partners: more than £212,000 – compared with £35,000 for women.

For those aged between 45 and 54 (the age group most likely to get divorced), the difference is lower but still more than double. Married men will have around £86,000, compared with £40,000 for married women of the same age.

This disparity has been worsened by the fact that more than £1 billion of state pensions were not paid out. A National Audit Office report showed that 134,000 pensioners – mostly women – were underpaid because of repeated human errors involving outdated computer systems.

Get Specialist Legal Advice

Getting divorced? Ending your civil partnership? Do not agree to the sharing of a pension (or any other financial assets) without first getting expert legal advice. You may also need advice from a regulated financial professional such as an IFA.

Pensions can feel complex and bewildering at the best of times – and even more so when you’re going through the emotional upheaval of separation and divorce. It’s at times like these you need the sound professional advice and reassuring support of an experienced divorce lawyer.

Contact Coles Miller Associate Senior Family Lawyer Lindsey Arnold for expert legal advice on divorce, children arrangements and how to secure a fair financial settlement – helping you to start the next chapter of your life with confidence.

This document is not intended to constitute and should not be used as a substitute for legal advice on any specific matter. No liability for the accuracy of the content of this document, or the consequences of relying on it, is assumed by the author. If you seek further information, please contact Managing Partner Neil Andrews at Coles Miller Solicitors LLP.