The treatment of pensions in divorce is one of the most technical areas in family law. It is possible to give a fairly simple overview, but beware – the devil is in the detail, and you need to get advice from an expert divorce lawyer about your own situation. Each pension scheme is individual, and has its own specific rules and potential snags.
Pension provision is the most valuable asset many families have, often it is as important, or more important than their home. But pensions are an unfamiliar subject to most people, so they require careful explanation and understanding, particularly in the context of divorce. The family home is often owned in joint names, but if it isn’t there is a general acceptance that in most cases the value of it should be shared, and, if necessary, it can be sold and the proceeds can be divided. But a pension can only be in one person’s name, and it is not something you can sell, so the task of sharing it or dividing it becomes much harder. But generally a divorce court will want to review and adjust the pension arrangements between a separating husband and wife, except, possibly, where they are both very young and have limited pension arrangements. To explain how this works, we need to start with a broader explanation about pensions generally.
Pensions come in many shapes and sizes – each of them is individual, and there is no standard pension scheme, but they generally fit into a few different types and it is important to understand which category your scheme comes into, because the options available in the context of divorce are different.
The simplest type of pension is really just an investment fund into which you make contributions during your working life. It is a type of savings plan, with rules about when the money can be taken out. In return for accepting the rules, and to encourage us to save for old age, the government give contributions into the scheme special tax status. Most modern pension schemes run by employers including “stakeholder” schemes are of this type – with the added benefit that the employer agrees to make a contribution into the employee’s scheme in addition to the contribution the employee makes him/herself. These schemes are known as defined contribution schemes because the money the employee receives in retirement depends on how much has been saved into the scheme.
Under some pension schemes the money the employee receives in retirement depends on his/her salary at the date of leaving multiplied by a number of years’ service. The NHS pension scheme, and the Armed Forces Pension Scheme both come into this category. They are known as defined benefit schemes. Some large-scale employers still operate this type of scheme, but most of them are gravitating towards defined contribution schemes, because they are much easier and less risky to operate.
Defined benefit schemes then subdivide into two categories known as funded and unfunded schemes respectively. Funded schemes are mostly run by large employers, and the defining characteristic is that the people administering the scheme (the trustees) will have a large investment portfolio from which they intend to pay the pensions of the various members as they reach retirement. Unfunded schemes are mostly to be found in the public sector. The defining characteristic is that the people running an unfunded scheme (the administrators) do not hold an investment portfolio, instead they intend to pay the pension from future income, usually taxation income in the case of public sector schemes. The distinction is important because the options available in divorce are quite different between the two.
Self invested pension schemes (sometimes called SIPs) deserve a special mention. They are a type of personalised defined contribution scheme, where the pensioner has a good deal of say about how the scheme holds its investments. Often when a business owner wants to acquire for the business to operate from s/he is advised to acquire them in a SIP, which then rents the premises to the business. This can be a tax effective strategy, but Sips can present particular problems in the context of the divorce.
The State Pension is a different category of scheme. It has never been particularly generous but most people include it in their retirement planning, and it has been changed over the years. In 2006 the government introduced a revised state pension scheme called the New State Pension. The options to share the New State Pension in divorce are very limited..
If you get involved in a discussion about pensions in divorce you will very quickly come across the expression cash equivalent (sometimes abbreviated to CE )which requires explanation. It is intended to help compare one pension scheme against another, but it needs to be treated with caution and its limitations understood. The CE is a figure used within the pension industry for other purposes – it was never specifically intended for use in divorce. Essentially it is a number by different pension schemes, to value accrued benefits when a scheme member moves from one scheme to another. It is an indicator of the value of a pension scheme, and it gives a method of comparing one scheme against another. But, despite the name, it does not literally tell you how much the pension scheme is worth compared with other assets such as money in a bank or bricks and mortar. It can also be misleading where you are comparing two very different types of pension scheme.
So if you become involved in a divorce, you will need, first, to put together a list of all the pensions you, and your husband/wife have. You will be asked to obtain a cash equivalent value for most of them, but you should do that in consultation with your solicitor, because, generally, you can only request one cash equivalent value each year.
You then need to decide what you are going to do to address any difference in the pension schemes. There are essentially three options.
The first option is known as a pension attachment order. This is essentially an arrangement under which part of the lump sum and pension payable to the employee in retirement years, is diverted to his or her former husband/wife. Pension attachment orders present a number of practical difficulties, and on the whole are not used very often.
The second option is known as a pension sharing order. Under a pension sharing order, essentially, part of the pension CE is taken away from the employee and placed in a separate scheme for his/her former husband/wife. Although this is simple in principle, the detail can be very complicated, and varies depending whether you are dealing with a defined benefit scheme, or a money purchase scheme.
The third option is to leave the pensions where they are, but to take any difference into account when adjusting other assets. This is known as pension offsetting. It is very complex and difficult subject, and it is very difficult to determine how the right figure to “offset” against a particular pension arrangement, unless you have expert advice.
To guide you through the maze of pensions in divorce you really need advice from a specialist divorce lawyer who has a good understanding of this subject. You may need to obtain advice from an actuary about the various options available and what their effect would be, or, in certain cases from an Independent Financial Adviser who specialises in pensions. You need to obtain that advice with support from your solicitor, to make sure that the information you receive is reliable. The subject is a minefield, and small mistakes can be very costly in the longer term.
You should arrange to speak to John Pratley, our specialist divorce solicitor at Apple Tree Family Law about your own situation. He can guide you through these issues, and negotiate on your behalf, or be by your shoulder as you go through mediation. He can usually offer an appointment within 24 hours
John Pratley is an expert divorce lawyer, who has more than 25 years experience advising clients purely about divorce and related family law issues, such as the financial consequences of separating and divorcing. After establishing the first niche family law practice in Bristol, and going on to senior management roles in a national firm, John set up Apple Tree Family Law in 2018. Apple tree family Law solicitors specialise in advice about divorce and financial issues.
We are based in Bristol and Exeter, but we have clients all over the UK and further afield. We offer, simply, clear and accurate advice about divorce and family law issues, and the very best client service, for a clear and reasonable price.
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