When it comes to divorce, individuals often underestimate the significance of their pension because it’s something that is there in the background which they may not be able to access for some years to come. Whilst a pension will hopefully one day provide an income in retirement, it also has a significant capital value which divorcing couples will want to take into account when deciding how best to divide up their assets.
In this article, we take a look at the impact divorce can have on your pension and the family court’s views on what is often the most significant asset in a marriage.
There is often a misconception that pension rights accrued by a spouse are not matrimonial assets and therefore should not be shared with the other spouse as part of a divorce. This is not generally the case, unless for example the marriage has been particularly short. The court will assess the value of the parties pensions as well as the other non-pension assets and their respective incomes. This includes pensions accrued prior to the marriage and sometimes those accrued post separation.
There are many different types of pension scheme with the two most common types being defined contributions schemes and defined benefit schemes. Defined contributions schemes require an individual, and their employer if it's a workplace pension, to contribute a regular sum over a number of years.
By contrast, defined benefit schemes can be ‘final salary’ or ‘career average’ schemes. Final salary schemes are based on what you are being paid when you retire whereas career averages schemes take your average salary across your career. Most public sector pensions such as NHS, armed forces and teachers’ pensions are defined benefit schemes and are often considered more valuable than defined contributions schemes.
The court will usually look at any state pension provision together with the capital value of any private pension when assessing the income needs of each party. This is most commonly the cash equivalent value, often referred to as the CEV of the pension. Most pension providers will provide one CEV per pension per year free of charge, although it varies from scheme to scheme.
Sometimes however, the CEV may not represent the true value of the pension fund and this is commonly the case with defined benefit schemes. It may therefore be necessary to engage an actuary or pension on divorce expert (PODE) to confirm its value. The PODE can also identify whether one party’s pension should be subject to a pension sharing order or pension offsetting as part of a settlement. This is to ensure that both parties have ‘equality of income in retirement’ and that both of their needs are met. This is not to say you will receive half of the total pension provision each as it will depend on a variety of factors including the age, health and incoming raising capacity of each party between now and retirement.
It's difficult to say how a pension will be divided on divorce as every pension fund is different. It also depends what other non-pension assets there are to meet both parties' needs. However, it doesn’t matter who’s name the pension is under and the court has wide discretionary powers to allocate pension provisions to meet needs. The court is also under a duty to achieve a clean break where possible so that each party has financial independence from one another.
The court has the discretion to make a variety of orders including:
For more information, see our 'Pensions in divorce: What orders can the court make?' article.
Why choose Ashfords?
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We recommend advice at an early stage to consider your options and make an informed decision about your next steps. For more information, book a consultation with Jayne Turner or another member of our family team at our Exeter, Bristol, Plymouth or London offices.
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