When married parties divorce, discussions around financial settlements often focus on tangible assets such as the family home or savings. Yet, pensions are frequently one of the most valuable assets in a marriage and one of the most complex to divide. Failing to consider pensions properly can lead to unfair outcomes and future financial insecurity, particularly for those who have taken career breaks or worked part-time to support family life.
The Importance of Pensions in Financial Settlements
The courts in England and Wales treat pensions as matrimonial assets, to be considered alongside all other financial resources. Depending on the individual circumstances, pensions can be shared equally, offset against other assets, or in some cases left untouched. The guiding principle is fairness, with a focus on achieving a clean break wherever possible.
Methods of Pension Division
There are 3 main ways pensions can be dealt with on divorce:
- Pension Sharing: This involves dividing pension benefits at the time of the divorce. A pension sharing order transfers a percentage of one party’s pension pot to the other, providing them with a pension in their own right. This is often considered the fairest and most transparent approach, particularly in long marriages.
- Pension Offsetting: With this method, one party retains their pension in full, while the other receives a larger share of other assets (for example, more equity in the family home). While offsetting offers immediate simplicity, it may not provide long-term security for the party giving up their pension claims, and an accurate valuation will be essential.
- Pension Attachment (Earmarking): This older approach allows for a portion of a pension to be paid to a former spouse when it becomes payable. It doesn’t offer the same level of independence or certainty as sharing and is now rarely used in modern practice.
Different types of pensions
1. State Pension: Is paid out by the government which is based on how many qualifying years of national insurance payments one has made.
2. Defined contribution pension: These can be workplace pensions where both you and your employer contribute a set amount into your personal pension pot or where you contribute into a private pension.
3. Defined benefit pension: Where a fixed amount is paid out upon retirement. There are two types of defined benefit pensions, one is a private sector pension, paid into a trust fund by the employer & the other is a public sector pensions for example, NHS, Police, Teachers, Civil Service etc.
Valuing Pensions
Valuing pensions is not always straightforward. Defined benefit (final salary) schemes can be misleading if only the Cash Equivalent Transfer Value (CETV) is considered. Expert actuarial advice is often needed to determine true value and ensure a fair division. The courts will consider needs, sharing, and compensation principles in deciding what is appropriate. It is advised early engagement with a financial expert such as a pension actuary who deals with valuing pensions and provides pension reports is advisable.
Common Pitfalls
- Undervaluing pensions: CETVs may not reflect the true value, especially in public sector schemes.
- Ignoring state pensions: While they may not be shareable, they form part of the overall financial picture.
- Assuming equality always means 50/50: The focus is on fairness, and in shorter marriages or where needs differ, unequal sharing may be appropriate.
Conclusion
Pensions are too important to be an afterthought in divorce proceedings. Addressing them properly requires a clear understanding of legal, financial, and actuarial issues but doing so can make a fundamental difference to future security.
Further Information
If you would like more information or wish to discuss this topic further, please feel free to contact Monika Brar at JPC for a free initial 30-minute consultation.
Email: mbrar@jpclaw.co.uk
Tel: 020 7644 6305
