Pensions sharing and divorce
By Mike Narouei, Content Producer at Boring Money
2 May, 2017
Paraplanner Richard Allum explains how pensions are often the second most valuable asset in divorce. How can you split them and what does it mean for you?
For most divorcing couples, the family home is the most valuable asset but, in many cases, the value of the combined pension funds often comes a close second. The big difference is that you can see the house, but finding out the true value of a pension is not always so easy. Pensions can be complicated, especially some of the 'gold plated' company schemes know as 'final salary' or 'defined benefits' and it can pay to get expert advice to help you through the process.
When completing your Form E financial disclosure document, both parties will need to provide the values of all the schemes including:
For ‘final salary’ or ‘defined benefit’ schemes you will need a Cash Equivalent Transfer Value or CETV. For other types of company scheme and private pensions you’ll need the fund value. It’s not currently possible to share State Pensions but they can be taken into account when working out a fair split and it is possible for one spouse to boost his or her State Pension by using their former partner’s National Insurance record. Older divorcing couples may already have pensions being paid and details of these also need to be provided.
The values should be no more than three months old and all scheme administrators are required to provide them. In Scotland only the value of the pensions built up during your marriage or civil partnership are taken into account. In the rest of the UK it’s the total value that’s used before and during the time you were together. That can make a big difference so it’s important to know which rules apply to you.
There are three main ways that pensions can be dealt with in a divorce:
The simplest & ‘cleanest’ option for many as it gives a clean break
The value of the pension is offset against other assets.
e.g. one spouse keeps the pension & the other keeps the house
Attachment or earmarking:
You get some of your ex’s pension when he or she starts taking it.
This may sound simple but you won’t get anything until your ex does.
In some cases this can mean waiting a long, long time.
Unless there are no other options this is often avoided as it doesn’t give the clean break many want.
The newest and most popular option.
You get a share (%) of your ex’s pension or pensions.
Your share is either held in the same scheme or transferred to your own pension.
If there's a bit of an age gap and one of you has already retired, a deferred pension sharing order can be made coming into effect when the younger partner is able to receive a pension (normally 55).
You can agree an offset order between you but only a court can make a pension sharing or attachment order. If there is a final salary or defined benefit scheme involved, a joint expert (normally an actuary) can be appointed to calculate the values and what percentage share the court should make to achieve pension equality. This would typically cost about £1,200.
In most cases a pension sharing order will be agreed and the court will issue the appropriate documents for it to be implemented once the financial settlement has been agreed. This will give you the right to a ‘pension credit’ from your ex’s scheme. Most public sector schemes, like the NHS for example, insist that pension credits remain in the scheme and they do not allow you to transfer away to a personal pension. You would become a member of the scheme and receive your benefits at the normal retirement age in the same way as your ex.
Most private sector schemes are more than happy to let you take your pension credit off to your own personal pension. To implement the order, the pension scheme will require both you and your ex to take certain actions. You will need to nominate a pension to receive your credit; if you don’t have one yet take a look at our recommendations here (http://www.boringmoney.co.uk/pensions/private-pension/). The scheme will charge for implementing the order; yes, more fees. If your ex doesn’t comply the sharing order can’t proceed and it remains under their control. You can go back to court to make things happen if they’re being awkward. The whole process can take up to 4 months but what’s it’s done, the pension credit is under your control and nothing to do with your ex.
Some things to watch out for:
Final salary or defined benefit schemes often come with valuable benefits payable on your ex’s death to you or any children. These are often lost following divorce and you should take them into account in the negotiations.
If one of you has pensions worth over £1 million there could be tax issues due to something called the lifetime allowance. This is another issue where good advice is essential.
The pension freedoms introduced in 2015 mean that it’s possible in many cases to withdraw the full value of a pension fund at 55, although a hefty tax bill is likely to follow. This could be useful in the overall negotiations about a financial settlement.
If you share some of your pension with an ex it means that you’ll have less than you thought when you retire and you should think about saving extra to make up for it.
Pensions can be very complicated and it is often well worth spending some money on advice as the cost could be returned many times over in the sharing order you get. You can look for a financial adviser at VouchedFor. You can also head to our Pension Best Buy table to compare providers and find the right fit.