Understanding pensions in a family law context

    In contemplation of any family law proceedings, it is important to consider any retirement benefits to which you or your partner may be entitled.

    Pensions, whether ‘defined benefit’ (final salary), ‘defined contribution’, or ‘state’, can form an integral part of any settlement reached by the parties as to the division of financial assets in family law proceedings.

    Pensions are a way of saving for your retirement. You or your partner may have put money into your pension each month. In return for this monthly contribution, you are entitled to a regular income and/or a capital lump sum payment once you have retired.

    Pensions are an effective way to save for retirement, as an individual does not have to pay tax on pension contributions, meaning that an individual’s gross income is transferred into the relevant scheme (as opposed to the net income, which is what would ordinarily be received by an individual).

    It is very important that you consider whether you or your partner have accrued pension rights under all types of pension provisions, as individuals often have multiple interests under different forms of pension schemes. The division of income received pursuant to pension schemes can form a substantial proportion of any financial award within family law proceedings.

    Types of pensions

    There are three types of pension, a) a state pension, b) a workplace pension, and c) a personal pension.

    State pension The basic state pension is a weekly payment from the Government, which an individual receives upon state pensionable age. To qualify for a state pension, an individual must have paid, or been credited with, National Insurance Contributions. The amount that an individual can claim under a state pension depends on the number of contributing years (usually proportionate to the number of years in registered employment). The number of qualifying years of National Insurance Contributions for the payment of a state pension is 30 years, but this will increase to 35 years in 2016. In the event that an individual does not have enough qualifying years (for example due to unemployment, illness, time out of work) additional voluntary contributions can be made so that the individual is entitled to receive a state pension.

    A state pension can be topped up with voluntary National Insurance Contributions which may enable additional payments under an individual’s state pension.

    The age at which a state pension can be claimed is currently 65 for men and between 62 and 65 for women, depending on when you were born. By 2018 the state pension age for all women will be 65.

    If an individual is currently employed, they may also be building up a second state pension. This additional state pension is based on your National Insurance Contributions. How much an individual can claim under the second state pension depends on their salary. Unlike the state pension this is not a fixed amount. An individual will receive the state second pension automatically unless they have opted to contract out of it.

    Workplace pension Payments made under a state pension are generally not high enough to provide for an individual’s required retirement income, therefore, most individuals choose to take out a pension with their employer to supplement their state pension payments. A workplace pension, organised through an individual’s employer, takes contributions from the individual’s gross pay, the employer and the government. The accrued funds are then used to provide the individual with a pension upon retirement.

    An individual’s contribution to a workplace pension is made in the form of an agreed percentage taken from their salary each month. The employer’s contribution is often set at a level matching that of the individual’s contribution to the pension fund. The contributions are then invested, through the pension scheme, into different investment portfolios (often with varying degrees of investment risk that can be specified by the individual) in order to increase the amount the individual has in their pension scheme.

    There are two types of workplace pension: defined benefit (otherwise known as final salary) and defined contribution.

    Personal pension Personal pensions are set up by an individual independently of their employer. The individual must pay money into a pension scheme (run by a separate provider) and will receive a sum on retirement with which the individual can purchase an annuity which is a type of financial product that gives an individual a level of retirement income for the remainder of their life.

    The provider of the pension scheme will invest the money contributed by the individual with a view to increasing it so a greater level of annuity can be purchased.