The law surrounding pensions and divorce is extremely complicated and although you and your ex-partner can agree to offset your pension without a court order this may not be practical or possible.
In such cases it is absolutely paramount that expert advice is obtained from the outset. Either party may start proceedings and submit a financial claim against the other party.
In a divorce pensions can be the biggest asset after the family home. It’s up to the parties involved, their lawyers and the courts to decide on the best method to use when considering pension rights in a divorce settlement.
You can split pensions several ways, and there are advantages and disadvantages in each case. So it’s worth understanding the options when a marriage or civil partnership ends. Courts will tend to deal with the pension arrangements in one of 3 ways.
This is where the value of a pension is offset against other assets. This is probably the most popular method used in divorce and dissolution cases today. Pension offsetting provides the cleanest break, is the cheapest option and notably the simplest. With offsetting both parties keep their respective pensions (taken as cash values).
The value of the pensions are taken into account when assessing all of the assets involved. Then other assets, such as cash, investments, and property are balanced against the pension benefits to arrive at a fair split.
When part of your pension is paid to your former partner, this is known as pension attachment or more commonly a pension Earmarking order. This is a bit like a maintenance payment directly from one person’s pension pot to their former spouse or civil partner. It essentially ‘earmarks’ a percentage of the benefit, however the pension benefits continue to belong to the member. This can be disadvantages to the receiver, as the member will still control the start of any pension payments. Furthermore the income tax due will be at the members rate, which could be a higher rate than the receivers income tax rate. Pension payments to the ex spouse will also automatically stop on the members death as well as stopping if they remarry.
Pension sharing is another route whereby you are given a percentage share of your former partner’s pension pot.
The money that you get from the pension of your former spouse or civil partner is then legally treated as your money.
Pension sharing therefore means that pensions are included in the total value of marital assets. It allows one person to get a percentage of the total value of the other person’s pension. That money is called a pension credit and can either be transferred into an existing pension, a new pension or an extra pension as part of the existing scheme. Only a court may make a pension sharing order. The deduction made from the other parties pension is known as a pension debit.
A pension sharing order can be made against all types of occupational pension scheme such as a final salary pension. Additional voluntary contribution (AVC) scheme or an unfunded public service scheme. An order can be made against a private pension scheme such as personal pension, stakeholder pensions, retirement annuity policies and the state earnings related pension scheme (SERPS).
Enhanced Lifetime Allowance/Pension credit factors
Pension sharing orders can become complicated where the value of the pensions is high in value, especially where there are lifetime allowance protections in place.
An ex-spouse party to a sharing order may be able to claim a lifetime allowance enhancement provided certain conditions are met. How this is dealt with depends on whether the pension credit rights were acquired before or after 6 April 2006.
Where one party is entitled to a pension credit, the individual awarded the credit that has already been tested against the (member's) lifetime allowance will be entitled to claim a pension credit enhancement factor to his or her lifetime allowance. This is expressed as a factor. So for example a credit of £250,000 on a lifetime allowance of £1 million will be 0.25. This would then provide a new lifetime allowance of 1.25million.
Where the deduction is made from one parties pension this is known as a pension debit.Importantly the debit will not result in the loss of Enhanced or Fixed protection and the remaining benefits will continue to be protected. If an individual decides to make further pension savings to build up their funds again after the debit then the enhanced or fixed protection would be lost.
Divorce and State pension benefit
How divorce affects your State Pension will depend on which State Pension you get. Which is dictated by your State pension age.
Basic State Pension
Your Basic State Pension can’t be shared if your marriage or civil partnership ends. Divorced couples can use their former spouse or civil partner’s National Insurance contributions to increase their basic State Pension. This won’t reduce the amount of State Pension the other person receives.
If you have an Additional State Pension the court could order that this is shared between you. You lose these rights if you remarry or enter into another civil partnership.
New State Pension
Equally the New State Pension can’t be shared if your marriage or civil partnership ends. If you have a ‘protected payment’, which is an additional payment you may get on top of the full State Pension. The court could order that this is shared between you.
If you’re thinking about getting divorced and you’re confused about what this might mean for your pension, The Pensions Advisory Service (TPAS) now has a free service to review your options by phone.
To find out more and book your free appointment to speak to someone, visit the TPAS website - https://www.pensionsadvisoryservice.org.uk
If you have a final salary or other salary-related pension scheme, getting an accurate valuation might be more complicated. You should ask your provider if they can give you a cash equivalent transfer value, but be aware that this rarely reflects the true value of these schemes.
Pensions and divorce can be a complex area and it’s worth getting expert help from a financial adviser who specializes in this area.
For a more detailed discussion on this topic, get in contact with me today.