When we think about splitting assets in a divorce, most of us think about property and savings. However, it is likely that in your marriage, at least one of you will have a large pension. This valuable pension is part of the financial pot that you will be looking to split fairly during a separation. The problem with this, though, is that pensions can be a complicated matter, which is why The Divorce Manager has put together this handy guide to help make the process clearer for those involved.
What is a Pension?
Firstly, what is a pension? Well a pension is the regular income that you will receive once you retire, which will help you pay for bills and everything else you need. Most people will pay a percentage of their income – which is usually matched by their employer, into their pension pot.
There are a number of different pensions available to those in the UK. Most common is your state pension, which is handed out from the government. This pension is funded from all the national insurance payments you made over the years. You also get private pensions, which may have been set up by the company you work for or through a pension company.
What is the Valuation of a Pension?
Before you discuss the splitting of a pension, it’s important that you get a valuation for that pension. This valuation, which is known as the Cash Equivalent Transfer Value (CETV), will tell what a pension is worth at the time of the valuation. Your pension company should be able to perform this valuation for you, letting you know how much money is available to be removed.
To get this valuation, a form needs to be filled in (FORM P) and sent to your pension provider. This should be free, unless you have asked for multiple valuations over a period of 12 months, although each pension company operates differently.
Generally, a pension valuation will take a few weeks to complete. So, if you’re looking to get your divorce finalised quickly, get a valuation as soon as possible.
Why is a Pension Shared in a Divorce?
When a pension is added to over the course of a marriage, it means that person used a percentage of your joint income to build that pension. Which is why it is considered a financial asset in a divorce, and a court will look to compensate the person who will not benefit from that pension in the future.
State pensions cannot be shared, however, pensions such as: employer, personal, second state and final salary are all considered as assets in the eyes of the court.
What Happens When You Have Your Pension Valuation?
Once valued, you will both need to agree how to split a pension as part of your financial settlement. This is often conducted in three ways:
1: Pension Offsetting
When you decide to offset a pension, those involved in the divorce will look at all the assets available in the separation and offset the value of the pension by offering more assets to the party involved.
This could be as simple as a pension holding around the same value as a jointly owned property. So, rather than selling the home and splitting a pension, one person will receive the home and the other will keep their pension.
The problem with offsetting is that pensions grow in value over time, so parties may not like the idea of offsetting. Generally, though, a pension offset is useful when; pensions are small or equal in value, the separating couple are young (so have time to build their own pension) or when one party needs the family home more (i.e. when they have children).
2: A Pension Sharing Order
A sharing order will require the value or benefits of a pension to be shared at the time of a couple’s divorce. This is usually in the form of a percentage that needs to be transferred from one person’s pension fund into the other person’s fund.
These orders can only be created during a divorce and will start taking effect after that divorce is finalised.
3: Pension Attachment Order
An attachment order will require one person to give the other party part of their pension when they retire. This may be in the form of a lump sum or might require a percentage to be paid monthly. This means that the party to receive part of the pension will need to wait before receiving any benefits.
These pension attachment orders are not always a good idea for those divorcing. For one, it outlines a commitment that means you will need to contact each other in the future, which isn’t attractive to those wanting to remove each other from their new lives.
Worse, the courts cannot enforce a party to continue paying into a pension. Some people may stop payments so their former spouse will not receive the money. They may also put off retirement to stop payments being made.
Generally, an attachment order is only used when a pension is very small and will gain value in the future.
If you need help with your divorce or separation call The Divorce Manager on 0800 294 0452 to book your FREE consultation.