A pension can be one of the biggest assets to consider during a divorce or dissolution. For those divorcing later in life, pensions often hold significant value – and are often the second largest in value after the family home.
Yet despite this, pensions are frequently overlooked, bypassed, or otherwise not taken into consideration during financial settlements.
With pension pots being such a key element, we look at what the options are when it comes to dealing with pensions on divorce.
When it’s decided that a pension will be shared, the pension is divided by way of a percentage of the pension being legally transferred into the ownership of the other spouse with immediate effect. This is usually achieved by way of a transfer into a pension in their own name. In some instances, the recipient can join their ex-partner’s scheme to gain access – it depends very much on the scheme’s rules and what is allowed.
Pension Earmarking / Pension Attachment
Pension earmarking made as part of a divorce settlement requires part of the member’s retirement benefits and / or lump sum death benefits to be paid to their former spouse / civil partner. The earmarked benefits continue to belong to the member which means that the member controls investment decisions and importantly when any payments start (subject to scheme rules). In addition to this pension income payments, including the earmarked portion, will be taxed at the member’s marginal rate of income tax.
Normally pension payments to the former spouse / civil partner will cease if the member dies or if the former spouse / civil partner remarries unless the terms of the earmarking order provide clarity around such an event or provide provision for a lump sum payment upon death.
This is where the value of a pension is offset against other assets, typically the family home. In such cases, one spouse might keep their pension, or a larger share of it, in exchange for a lesser share of the house. Whilst this has traditionally been a popular method of dividing pension assets, the courts have recently indicated that offsetting should be avoided in the majority of instances and that pensions should be dealt with separately and discretely from other capital assets.
Other points to note
Any pension can be shared in a divorce or civil partnership dissolution. This includes self-invested personal pensions (SIPPs), stakeholder pensions, any pensions obtained through an employer, and any “protected” part of a State Pension.
The division of a final salary pension is more complex and will either involve the transfer of part of the pension to a different scheme that allows the money to be divided, or alternatively, the scheme can pay a share of the income to the former spouse.
It isn’t in the interests of either party to ignore a pension. For the party with the lesser pension, their future financial stability and retirement could be adversely affected. For the party with the larger pension, there could be a chance that a financial claim is made by their ex-spouse years down the line, by which point the value of the pension may well have increased even more. The only circumstances in which this would differ is if a financial settlement has been reached and been formally recorded in a legally binding court order.
Pension contracts can be highly complex and depending on the type of pension and the individual pension contract, the preferred route can vary.
Due to the intricacies involved, the pension fund is likely to be one of the most difficult assets a couple will have to split in the event of a divorce, so expert legal and financial advice is imperative.
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