Pensions on Divorce

As approximately one in three marriages end in divorce it is becoming an increasingly large market in the pensions field. This is mainly due to the fact that the pension is usually the second largest marital asset after the marital home. There are a number of options available with regard to pensions and divorce.

The Matrimonial Causes Act 1973 (MCA 1973), gave courts in England and Wales the power to take both private and occupational pensions into account when deciding on divorce settlements.

Offset

The way the offset works is as follows:

1. The court instructs the member to obtain a cash equivalent transfer value (CETV) for a final salary scheme or current fund value for a money purchase scheme
    
2. The value is combined with other matrimonial assets and the court decides on how they are divided between the parties.
    
3. The value of the pension is offset against the value of other assets so that the member keeps their equivalent pension fund and the ex spouse retains more of the liquid assets.

The court has agreed a split of assets on divorce. This obtains a clean break and is very easy to administer. Offset is still the most popular form of settling the pensions issue on divorce because it achieves the court’s requirement of a clean break.

Earmarking

Earmarking was introduced by the Pensions Act 1995 and amends the MCA 1973 (s.166). The main issues are:

1. Pension rights must be taken into account when settling a financial position on divorce.
    
2. Courts have the power to direct a pension scheme to make payments to an ex spouse on behalf of a scheme member.

Earmarking does not apply to basic state pension because of the availability of State scheme substitution. On divorce this allows the ex wife to substitute her husbands NIC track record for her own to boost her own track record to maximise her Basic State Pension. The husband does not lose any of his credits, but this substitution has to be applied for, as it does not happen automatically. The ex spouse loses these extra credits if she subsequently remarries.

Pension Sharing

Introduced by the Welfare Reform and Pension Act 1999 it applies to divorce petitions made after 1st December 2000.

1. The court instructs the member of the scheme to obtain a CETV. The valuation assumes that the member is leaving the scheme.
    
2. The court decides on how much of the CETV the ex spouse is entitled to and this is expressed as a percentage of the CETV
    
3. Once the parties have agreed the share, the percentage the member loses is called a Pension Debit and the ex spouse receives a corresponding Pension Credit in the scheme
    
4. The ex spouse has the right to transfer the pension credit to another approved scheme (with the exception of statutory schemes where they cannot transfer out). Alternatively, they become deferred members of the scheme. However, the trustees may force them to transfer out.

Observations and Summary

The choice of a good matrimonial lawyer and pensions specialist is paramount in deciding whether the pension arrangements between divorcing couples/partners are to be offset, part of an earmarking or attachment order, or part of a pension sharing order.

Time scales administration and processes in some cases require a detailed investigation. I.e.

1. Does the arrangement for dealing with the existing pension arrangements achieve a clean break
    
2. Will the ex spouse receive pension and or tax free cash in retirement
    
3. When will the member or the ex spouse be able to access pension benefits particularly under earmarking
    
4. What happens in the event of the ex spouse remarrying and who has control over the investment of the pension assets
    
5. Does the ex spouse have pension arrangements which are already deemed to be adequate
    
6. What happens upon death?
    
7. If subject to a pension sharing order how does the member build up lost benefits
    
8. What effect does the pensions debit have on calculating maximum benefits at retirement
    
9. Is it possible to fund an extra pension to make a penny shortfall, or are all alternative investment recommendations required to run alongside any pension funds
    
10. At retirement is pension from withdrawal or the purchase of an annuity preferable

What benefits have been lost in respect of death in service arrangements by the transfer out of the pensions debit?

The above represents just a few of the issues which need to be discussed, and should you have any further queries or wish to speak to a matrimonial lawyer please see our specialist website www.financeindivorce.co.uk