What happens to salary, bonus, and pensions in divorce?

Salary, bonus, and pensions all represent future sources of income a party in a divorce will receive. As such, these are not assets which do not constitute the ‘matrimonial assets’ of a case, those assets accumulated during the marriage, and as such the principles which apply to matrimonial assets, that these are typically shared on an equal basis, also do not apply. It should be noted, however, that the position in relation to pensions is more nuanced and is best considered separately (see ‘Pensions’ below).  

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Salary 

The court’s expectation during divorce and financial proceedings is that the financial status quo of the party should remain in the interim. If, for example, one party was financially dependent on the other prior to separation, then the expectation would be that this would continue through an arrangement of interim maintenance. 

In terms of financial settlement, salary is treated differently to those matrimonial assets which are shared. Divorcing spouses do not automatically have a claim to an equal share of the other’s income. Instead, the court considers salary and future income on a ‘needs’ basis. Therefore, a party may have a claim to a share of their former spouses income after the divorce if they are unable to meet their needs through their own or the assets available to them after settlement. This would entail a spousal maintenance order. 

Courts will, however, expect the parties to maximise their earning capacities after the divorce and so the term of any maintenance payments should only be so long as to allow the recipient to do so and meet their needs, if possible on the facts of the case.  

The prevailing wind in the family courts is to avoid the ordering of spousal periodical payments where possible and the courts have a duty to consider whether a clean break order is possible in any given case. Therefore, alternative mechanisms are available whereby maintenance can be capitalised into a lump sum for the recipient to invest and drawdown annually, creating a source of income without the ongoing attachment which spousal maintenance via periodical maintenance entails. 

In addition to avoiding a situation where one party is still financially dependent on the other, a lump sum can also provide more financial security to the parties in the long term. This is due to the fact that spousal maintenance is capable of being varied after financial settlement if circumstances change, such as if the former spouse making the maintenance payments loses their job. 

The court can also achieve a clean break by apportioning a greater share of the matrimonial assets to the financially weaker party, enabling them to meet their needs without the need for spousal maintenance.  

Bonus 

The court’s overall approach to bonuses is similar to income insofar as whatever claim a party has to their former spouse’s future bonuses is considered and calculated in reference to their needs. However, this approach will also be dependent on the nature of the bonus. If the bonus is guaranteed, then it can typically be considered as an additional amount of income.  

Discretionary bonuses, which are not guaranteed and may fluctuate in value, demand a more considered approach as the court cannot assume that a bonus will be received and be a of a certain value, and so cannot make an order on those assumptions.  

The case of H v W [2013] EWHC 4105 (Fam) is a useful guide to how the courts will deal with bonuses of this nature. In summary, where a bonus had historically represented a significant proportion of the parties income and was relied on throughout the marriage, then a judge is likely to order a percentage of that bonus to be paid to the dependent spouse each year. The percentage awarded would not typically be as high as 50% and, in the case of H v W, was 25%. However, based on the principle that maintenance should only be awarded to meet needs, the total amount received may also be capped at a monetary figure such that the maintenance does not exceed these needs.  

Pension 

Pensions are unique assets for several reasons. They are assets which only become available at a certain moment in the parties’ life and represent future sources of income. Pensions are also typically accumulated by one or both parties throughout the marriage up until separation as well as after. Finally, attributing a value to a pension, especially accounting for the differences between the various types of pension, such as SIPP, defined benefit, and defined contribution, can be a complex task. As a result of these reasons, pensions not obviously comparable to any other asset in a marriage and due to their complex nature, it is often advisable that a Pension on Divorce Expert (PODE) is instructed to consider the parties pensions in light of their other assets and how these can be best valued and considered in any division of assets. 

Pensions accumulated throughout the marriage are considered matrimonial asset and as such, come under the sharing principle. Pension accrual post-separation will not typically factor into any sharing of the matrimonial pot. It is therefore important that a value can be attributed to the pensions in the parties’ respective financial statements (Form E) and a Cash Equivalent Transfer Value (CETV) is the required form of valuation in this document.  

Pensions can be equalised in two ways. They can be equalised in terms of their capital such that the parties’ pensions post-settlement are of equal capital value. They can also be equalised in terms of their income. This is a complex actuarial calculation based on the parties’ life expectancies designed to equalise the income which the parties can draw from their pension pots post-settlement. 

Pensions can also be offset against other assets. In this scenario, a greater or lesser portion of a portion pot can be shared in light of the other terms of the financial settlement. However, due to the particular nature of this asset, direct comparison between a pension and, for example, any other liquid asset, is often a comparison between apples and pears, and if offsetting is being considered, it is generally advisable that a PODE is instructed to produce a report.