Pensions

What you need to do; The Law; Calculations

There are several categories of pensions, for example the State Retirement Pension, occupational schemes and private pensions; there are also several different types of pensions, for example final salary and money-purchase schemes, and it is beyond the scope of this note to describe each of them in detail. There is similarly a vast amount of pension legislation and regulations.

Pension interests are seen as ‘a resource of the marriage’ and as such are available to be re-distributed on divorce.

Courts will also consider the possible impact of the loss of prospective pension benefits that may occur as a result of divorce, for example the loss of prospective widow’s benefits.

In order to be able to compare the value of all the various pension schemes and plans that exist, an attempt is made to express their value in a ‘common currency’. This is called Cash Equivalent Transfer Value (‘transfer value’, for short). Pensions are said to have a transfer value of £x.

It is very important to remember that ‘£x of transfer value’ is nothing like as valuable as ‘£x of cash’. This is because although cash can be spent tomorrow on whatever you want to buy, you will not be given a cheque for the transfer value of your pension when you draw your pension. Putting it very simply, when you retire you may be able to take 25% of your transfer value as a tax free lump sum and the remaining 75% has to be used to provide you with an income in retirement (which you will hopefully live long enough to enjoy).

Pensions – what you need to do

Contact all your pension providers and ask them to let you have a Cash Equivalent Transfer Value of your pension interest. Also ask them to let you have their pack of information about Pension Sharing Orders.

You could also visit the www.direct.gov.uk website and follow the links to Pensions and Retirement planning and then to Getting a State Retirement Pension forecast. You will be able to apply for a State Retirement Pension forecast on line or over the phone.

If you are going to receive the benefit of a Pension Sharing Order you may need to take advice from a specialist pensions adviser about how you should invest the pension benefits that are going to be transferred to you.

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Pensions – the law

Historically Courts always took account of pensions but had no power to share the pension interests as such; all they could do was to give one party (usually the wife) a greater share of the overall capital to compensate her for the fact that her husband would retain his superior pension. This is called an ‘Off-setting approach’.

A couple can still choose to deal with their pension interests by adopting an Off-setting approach. The difficulty comes in deciding how much more capital should the wife receive now in order to fairly compensate her for the pension that her husband will retain. Lawyers can carry out some crude ‘range-finding shots’ for you but a ‘right’ answer does not exist.

Ask us to give you our estimate of what Off-setting solution might be appropriate in your own case.

The Courts then acquired the power to make what is now called a Pension Attachment Order. These allow the pension benefits themselves to be shared at the point they are received by the person who owns the pension interest. These have not proved popular with Courts; one major reason being that on the death of the person who owns the pension interest the pension dies with them and there are no longer pension benefits available for the surviving former spouse to share.

The only type of Pension Attachment Order commonly made is one in respect of the death-in-service benefits element of a pension; a husband might be asked to transfer a percentage of those benefits to his wife and children; equally he may want to preserve a percentage of it for the benefit of any future partner or children.

By far the most common way of sharing pension benefits on divorce is for there to be a Pension Sharing Order. This is an order directed to the organisation that provides the pension, requiring it to debit a percentage of the transfer value from their member and credit that amount of transfer value to the member’s spouse. The spouse will then either become a member of the pension scheme in their own right (if the Rules of the Scheme permit or require it) or will need to export the transfer value that is transferred to them into a separate pension scheme or plan of their own.

The attraction of this arrangement for the spouse who receives the pension transfer is that they are then in control of the pension scheme or plan into which the transfer value has been transferred. They will be able to draw their benefits from it even if their former spouse dies.

A few quick points to note

  • Pension Sharing Orders take effect only when there is a divorce - not when there is a separation.
  • A Pension Sharing Order may still be made in respect of a pension that is already in payment.
  • The pension scheme or plan that is being split will commonly make administrative charges, usually £500 - £1,000.

It may be reasonable to disregard the pension interests

  • If the transfer values are broadly similar.
  • If the marriage has been a very short one; but this may not be so if the couple are approaching retirement ages or if the transfer values are substantial.
  • If the couple are very young and pensions are a distant prospect.

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Calculating Pension Sharing Orders

What is transferred is transfer value - so you need to know the amount of transfer value available to be shared. Actuaries for some types of pensions initially provide transfer values that may not reflect the true value of the pension benefits that will be received; it may be necessary to instruct an independent actuary to obtain a fairer figure for the transfer value.

If some of the pension interests were built up outside the marriage then in some cases, but not all, it may be appropriate to disregard that part of the pension values.

There are two main approaches to calculating the percentage of the transfer value that should be transferred:

  • equalising the pension funds; and
  • equalising the pension incomes in retirement.

You should ask us to advise you about the appropriate percentage of transfer value that is to be transferred. If you aim to equalise the retirement incomes we will probably advise that an actuary should be instructed to carry out detailed calculations. Often this will be done by the Solicitors for the husband and the wife jointly instructing the actuary so as to share the costs involved.

A common factor is that typically a wife may be a little younger than her husband and, as a woman, her life expectancy is likely to be greater than his (unless there are specific health factors that apply). A wife may therefore require more than half of the pension funds to enable her to draw the same income for the longer period that she is projected to live.

Pensions is a complicated subject and one that often requires detailed advice. Getting it right can make a very big difference to the outcome.

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