How are pensions treated by the courts on divorce?

Pensions in Divorce

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. They are, nonetheless, still assets which are considered for division on divorce.

Attributing a value to a pension and deciding how to divide the same, especially accounting for the differences between the various types of pensions, such as SIPP, defined benefit, and defined contribution, can be a complex task. As a result, pensions are 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 and how these can be best divided.

State pension

The state pension is provided by the government, to which you contribute through National Insurance payments. On 6 April 2016 the law surrounding state pensions changed. Depending on when a person reaches state pension age (i.e. before or after 6 April 2016), different pension systems apply, and different elements of the pension are shareable based upon this and the date of the divorce petition. State pensions can be considered by a PODE in their report.

Private pension

There are many types of private pensions, and these are not funded by the state and instead are occupational or workplace pensions set up by employers or set up by yourself.

Private pensions generally fall into two categories – defined contribution pensions and defined benefit pensions. The difference is important in valuing and dividing pensions, as the quality and type of income from the two types of pension can differ.

Defined Contribution Pensions:

The defined contribution pension is the most common type of private pension, also called money purchase pension schemes. This type of pension is defined by the contributions you make to it, and its value is based on factors such as how much was paid in, how long it was invested for and how well the investments perform. As a result, what you get when you retire is not set in advance.

The most common types of defined contribution pensions are stakeholder pensions, personal pensions and workplace money purchase schemes.

Defined Benefit Pensions:

Defined benefit pensions are usually workplace pensions, run by your employer. The pension pot is not defined by what you pay but instead, the pension provider will promise to give you a certain amount each year when you retire (a “defined benefit”).

How the courts deal with pensions in divorce - is your spouse entitled to a share?

Whether it is right to share out pensions and how to do so will be dependent on the facts of each case.

Pensions accumulated throughout the marriage are considered matrimonial assets and as such, come under the sharing principle. An exercise may be undertaken to ringfence parts of the pension accrued prior to marriage. In the parties’ respective financial statements (Form E),aCash Equivalent Transfer Value (CETV) is required to be input for each pension a party holds.

Where pensions are to be equalised, this can be done in two ways. They can be equalised in terms of their capital value 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 when they reach a certain age (often, retirement age).

Pensions can also be offset against other assets. In this scenario, a greater or lesser portion of a pensionpot can be shared considering 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.

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