What happens to my pension if I separate or divorce?
When married couples separate, the divorce itself is intended to be a straight forward procedure, even more so when no fault divorce is made law. But with divorce comes the issue of resolving your financial arrangements. Partner Liz Cowell of the Group’s specialist family and children law practice, McAlister Family Law, explains.
Everything relevant is considered: the assets of the marriage, which might be the matrimonial home and/or other properties – perhaps a holiday home – any business interests, savings, investments and, of course, pensions.
Pensions can be the most valuable asset on divorce, particularly if one or both of the parties are members of a Final Salary/Defined Benefit Pension Scheme, as these provide specific benefits based upon salary and service, as opposed to a Money Purchase arrangement, where a member will receive benefits retained in an invested “pot” to which contributions have been invested over time.
In fact there are a number of different types of pension, and they can include complicated investment schemes which are, frankly, outside most individuals’ understanding and as a result likely to cause a great deal of confusion. Those who don’t seek guidance from an expert can find themselves being given incorrect and misleading advice from the most well-meaning of friends and acquaintances. If you base your claim on this type of misinformation, you run the risk of grossly under-settling. Always, always get expert advice.
What is offsetting?
In fact, it is very important to get advice at an early stage – even if you and your spouse are broadly in agreement regarding other matters – about financial arrangements after divorce, including how the courts are likely to deal with the pensions as part of any overall financial settlement. There are various options available to the non-pension member, who may benefit from their spouse’s pension fund built up during the relationship, including Pension Sharing or Attachment Orders, or offsetting against other assets, such as savings or equity in a family property.
Offsetting is fraught with potential difficulties and individuals can underestimate what a pension fund is worth, instead accepting a smaller cash sum now rather than a specific portion of the pension fund designed to provide a retirement income for the remainder of a recipient’s life.
In more complicated cases, particularly where the pension is already in payment due to retirement or ill health, it is common for us to advise that you seek advice from a pension expert – an actuary – who will provide a report about the different pension needs of both parties ,and the options within the court process. The conclusions of such reports are critical in informing the court about how issues in relation to pensions should be resolved. Again, we must emphasise how very important it is, from the outset, that you have a lawyer who is confident in his or her knowledge of pension issues. The correct questions must be, asked and it may be necessary to challenge, vigorously, any conclusion, making certain your interests are properly protected.
Pensions and assets: what does the Family Court consider?
Because of the various options available for the division of pension assets upon divorce or dissolution, there are many myths surrounding them.
For example, the recipient of a Pension Sharing Order does not receive an immediate lump sum equivalent to the “share” and will likely have to wait until their 60″ birthday or such other time defined by the scheme in which the benefits or held, or are transferred, to realise any benefits. Further, if the person having their pension deducted has already retired, they will experience an immediate deduction in any income they are already receiving, even if the recipient might not receive theirs for several years because of age conditions. This in turn has an impact on the extent to which other financial orders can be met, for example maintenance provision.
When deciding how to deal with your pension, and assets, the Family Court will consider several different criteria; it may be a Pension Sharing Order is not the best outcome based on the length of your marriage, the value of your pension, your length of service and the value of the other matrimonial assets. If a marriage is short, and pension funds limited, a court might prefer to “offset” any interest in pension funds generated during the marriage, against an interest in other assets. It is important to note that no two situations are the same and you should have a lawyer who understands these complexities and is able to put forward the best case to suit your own needs and circumstances.