How Is Your Pension Treated In A Divorce Settlement?
For many married couples, their pensions may be their biggest capital asset, second only to the family home. If your marriage breaks down, it is crucial to understand how a pension will be valued, treated, and divided when it comes to working out a financial settlement. A London family law solicitor can provide the best advice and representation when it comes to working out how your pension will be shared in a divorce financial settlement.
The courts take pensions seriously when working out financial settlements because if not divided fairly, they may cause significant financial hardship to one party, especially in cases where the marriage has broken up later in life.
A common example is where a spouse, generally the wife (however this is changing), leaves a high-paying career to raise children. He or she may take on a part-time role that is below their skill levels but fits in with the demands of family life. The spouse who continues to work full-time, seeing their salary increase year on year, may amass a comfortable pension by the time they retire. The non-earning spouse would have expected to rely on this fund to finance their own retirement. If the marriage breaks down when the couple are in their late forties or early fifties, the financially weaker spouse will have little time to save the amount of money needed for a comfortable retirement so that the existing pension will be treated as matrimonial property and divided between the couple.
Pensions you receive through work, or setup via a private pension scheme can be divided, as can an additional state pension. The basic state pension will not be considered as matrimonial property.
The valuation of a pension in a divorce
In England and Wales, the total value of the pensions each spouse has built up is considered by the courts. Pensions are valued using the ‘Cash Equivalent Transfer Value’ (CETV) which is the amount you would be paid out if you moved your pension elsewhere (sometimes referred to as the transfer value).
Valuation of pensions is highly technical and is must be managed carefully by professionals. This is especially true with regards to public sector pensions, which includes pension schemes authorised by statute for the:
- armed forces
- civil service
- local government
- National Health Service
For example, a public-sector pension may have a CETV value of around £500,000. However, if adjustments are made for future inflationary increases, the true value of the pension may be closer to £1 million, which can make a significant difference to the final financial settlement.
Dividing up pensions
There are several different ways a pension can be apportioned in a financial settlement. A family solicitor or financial advisor can examine the structure of any work, private or additional state pensions and provide guidance on the best option.
Pension sharing involves the pensions being shared between the parties. Once each spouse has been apportioned their share, the pension is transferred into their names; or it is possible to join an ex-partners scheme.
It may be more advantageous for one partner to offset the value of a pension against other assets; for example, they may forgo a share of the pension for a larger share of the family home.
You agree to share the pension at a later date. This is sometimes used when one party has already retired and claiming money from their pension, but the other has not yet reached retirement age. The is akin to one partner making a regular maintenance payment to the other.
Pension earmarking is more complex than pension sharing, and you are likely to require experienced legal advice, especially with regards to valuation.
Analysing the needs of a party when dividing pensions
When working out a financial settlement, under section 25 of the Matrimonial Causes Act 1973, the court must have regards to the financial needs of the parties. If one party has stepped back from their career to care for children and/or elderly relatives and therefore not built up a private pension fund or full entitlement to a state pension, this must be taken into account when considering how to share the pension in the financial settlement.
No one ever enters a marriage thinking that one day it may end. If divorce does happen unexpectedly, understanding how your matrimonial property and pensions will be divided can help give you a feeling of control and hope, to enable you to move forward to a brighter future.
An experienced divorce solicitor can provide you with the best advice on pension sharing and any other aspects of dividing your assets and wealth. In most cases, couples manage to work out a financial settlement between themselves and it is rare for the court to have to make a financial order. Even if a dispute arises, round-table meetings and/or mediation are often extremely effective ways of helping couples reach an agreement in a calm and respectful manner.
OTS Solicitors is a exceedingly respected Immigration and family law firm in London and is highly recommended by the Legal 500. By making an appointment with one of our Family Solicitors, you can be assured of receiving some of the best legal advice available in the UK today. Please contact us on 0203 959 9123