Pensions and Divorce: a quick guide
Aside from a person’s home, generally their biggest financial asset will be their pension so it’s vital that this is not ignored when agreeing a divorce settlement.
Pensions can be dealt with in three ways and we’ll have a look at each one briefly in this article:
- Pension attachment
- Pension sharing
The Matrimonial Causes Act 1973 dictates how pensions are dealt with on divorce and a solicitor will be able to advise you how it applies to your own situation.
Off-setting a pension is the traditional approach. It involves arranging martial assets in such a way that the pension remains intact in the hands of one single person. So for example, if they are roughly equal in value, one spouse might keep the matrimonial home and the other keeps 100% of their pension. Each person walks away with an asset of the same value and no money changes hands.
Pension attachment involves part of a person’s pension being ‘ear-marked’ for someone else when it comes time to pay out the lump sum and income on retirement. In other words, someone’s rights ‘attach’ to another person’s pension. Up to 100% of a pension can be attached in favour of someone else. Pension attachment is not very popular in practice because the person benefiting from an attachment order has no control over the pension. The pension-holder could vary how much they pay in each month, or stop payments altogether if they lose their job, or could retire early thereby limiting the amount available for attachment.
Pension Sharing is exactly what it sounds like! The pension is physically divided up into two pensions upon divorce and the parties and they can re-invest as they wish (as far as is allowed by the rules of each pension scheme) – this offers a divorcing spouse a higher degree of control over their future income.
Valuing the pension
Unless the pension is already being paid out to the pension-holder it is a ‘future asset’ and therefore difficult to value accurately. The court will use the Cash Equivalent Transfer Value, or CETV, as the best estimate of the value of the pension on any given date. The pension provider will be able to provide the CETV.
You should note that solicitors cannot give investment advice. They can advise you how best to deal with a pension in a divorce settlement but not what to do with any money you receive as part of a settlement. Your solicitor should be able to refer you to a reputable Independent Financial Adviser who can help you choose the best investments.