How are pensions valued for divorce?

Your basic state pension can’t be shared, and therefore, only the value of a party’s private pension will be considered by the court. 

Private pensions can be significant assets to consider when determining a financial settlement. How a private pension will be valued is dependent on the type of pension it is. Common types of private pensions include: 

• Defined contribution pension schemes 

• Defined benefit pension schemes 

The Pension Advisory Group published a report titled “A Guide to the Treatment of Pensions on Divorce", which provides helpful guidance on how the court will value and treat pensions.  

Defined contribution pension schemes 

A defined contribution pension is a common type of workplace pension. An employee contributes a portion of their salary to the pension pot and the employer may match or pay another fixed amount to be invested by the pension provider. Upon retirement, the amount available will depend on the payments made by the employee and employer, as well as the success of any investments. 

A standard defined contribution workplace pension will generally be easier to value, as its Cash Equivalent Transfer Value (CETV) can be obtained from the pension provider.  However, this valuation does not reflect the amount in your pension pot. Rather, it represents the lump sum you would receive if you transferred your pension to another scheme.  

If the CETV is insufficient or inaccurate, it may be necessary to instruct a pension on divorce expert (PODE) who will provide a valuation and expert evidence to assist the court. It is important to note that pensions within the same case should be valued on a consistent basis. 

Defined benefit pension schemes 

A defined benefit pension scheme may also be called a ‘final salary’ or ‘career average’ pension scheme.  

This is also a workplace pension scheme, but it is increasingly rare for employers to offer them, particularly in the private sector. Some public sector employers still provide this sought-after pension scheme, such as the Civil Service.  

The amount payable will depend on the individual pension scheme’s rules, and will usually be based on factors such as the employee’s salary and length of service, rather than investments or how much the employee has paid in. Upon retirement, the employer will pay the employee a set income for a specified period or for the employee’s lifetime.  

The CETV of a defined benefit pension scheme can also be obtained, but it may be less reliable in providing an accurate valuation, as it isn’t as simple as just looking at how much has been paid into the pension pot. As such, it is more likely that instructing a PODE will be necessary. 

Other pension schemes 

Self-Invested Personal Pensions (SIPPs) and Small Self-Administered Schemes (SSASs) can be valued in a similar way to a defined contribution pension.  

A SIPP is a flexible type of pension which allows you to select and manage a broad range of investments for yourself. As such, they may include investments in assets such as commercial properties, shares, and investment trusts. They can also be opened alongside a workplace or other personal pension.  

A SSAS pension is usually a defined contribution workplace pension for a small number of staff (generally limited to 11 members). They are more common for small businesses, particularly family-owned businesses. This type of pension is often attractive to business directors as they provide greater control and flexibility, as they can be independently manged by the business, rather than an external pension provider.  

The value of these pensions will be based on the market value of the investments held within them. However, given the range of investments which can be made with these pension schemes, determining the market value can be extremely technical and complex.  

Pensions are often one of the most significant assets to consider during a divorce. Vardags has excellent relationships with actuaries and pension experts, and can help you obtain and, if necessary, defend a pension valuation. Contact Vardags today for a free initial consultation with one of our expert divorce solicitors.  

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