Welcome to Wright Hassall’s podcast on “The Treatment of Pensions on Divorce”.
This podcast is part of our Family Law Series in which we will be guiding you through the treatment of pensions on divorce and sharing practical information to help you understand your options and the process involved.
In this podcast we talk about how pensions are approached on divorce and the impact of the Guide to the Treatment of Pensions on Divorce, a Report published by the Pensions Advisory Group in July 2019.
What are the issues with pensions on divorce?
- Pensions are complex and can be valuable, they are often one of the largest assets;
- There are many different types of pension with different applicable legislation which itself is constantly evolving;
- It is not unusual for pensions to be forgotten or ignored on divorce;
- Pensions can be complex to ‘share’. For example, calculating the cash equivalent value of a pension scheme can be difficult and is not always a suitable comparison; and
- The approach taken by experts when producing pension sharing reports can also be very different.
Do pensions have to be disclosed on divorce?
According to a recent survey undertaken by Scottish Widows, 70% of couples did not discuss pensions as part of their divorce settlement, but in some cases, pensions can be one of the largest assets available to the couple.
Married couples who divorce are legally bound to disclose to one another the full extent of their financial and personal circumstances. Such disclosure can be enforced through the courts if need be. That means the full extent of pension benefits must also be disclosed.
What is the purpose of the Guide to Treatment of Pensions on Divorce, produced by the Pension Advisory Group Report in 2019?
The report is designed to provide a more uniform approach to the treatment of pensions on divorce to produce a more consistent and fairer approach in the way that judges hearing cases will deal with pensions and the consistency of the approach taken by experts as to how best to share out pensions on divorce.
It acts as a guide to practitioners, the judiciary and pension experts, setting out exactly what the expert is required to do and the role the expert has in respect of the divorce proceedings as a whole.
How are pensions approached in divorce?
- Firstly, the parties should give disclosure of what pension assets there are. The guidance is clear – the information provided should be as comprehensive as possible. Most pension providers are now familiar with providing detailed up to date information to provide an accurate assessment of the value of the pension in accordance with the regulations. The information received can range from public sector schemes, private schemes and state schemes.
- It is then necessary to look at the kind of expert needed to report on the way in which those pensions might be shared. The Pension Advisory Group recommend within the report that a Pensions on Divorce Expert (‘PODE’) is appointed.
- The PODE, alongside legal and financial advisers can then assist clients in understanding what they can legally do with their pensions on divorce.
Pension sharing orders are orders which allow a couple to share their pension assets. The court can make an order against a pension that a percentage of one party’s pension value is transferred to the other party. This is particularly helpful where one party has a large pension and the other has no substantive pension provision.
Over the years, there have been huge inconsistencies in the approach taken by different courts and different judges as to how pension sharing should be dealt with. In particular, the Guide highlights the importance of ensuring that not only the immediate capital needs of the parties are met on divorce but also ensuring that all the time invested in a marriage is properly reflected in any divorce settlement to address equality of income on retirement as well.
Immediate Capital vs Income on Retirement
When a percentage of a pension is shared, that does not mean ready cash. The receiving party has to invest the value into a pension pot and there are limitations as to what can be done with that pot. Looking at headline figure of a cash equivalent value of a pension will not therefore assist the couple at all – they will need to take the appropriate financial advice to understand what they can do with that pension pot and how it may provide for them in the future.
Are there any other options other than sharing the pension?
One option is to negotiate a lump sum payment of cash instead of a share of the pension. We call this offsetting. However, pensions are complicated. Offsetting calculations are difficult since the pension pound is different to the cash pound because a pension is subject to taxation and discounting because of it’s utility value. Also, you can do more with cash than with a pension. A straightforward offsetting using a capital value can therefore be really difficult to get right.
What about pensions that have accrued outside the period of marriage, how will they be dealt with?
Historically it has been possible to negotiate or argue that pension benefits that have accrued before a marriage should be ‘ring-fenced’ and not subject to sharing. That would still mean a sharing of the pension benefits you have accrued during your marriage and the period in which the couple may have lived together before getting married.
The Guide to the Treatment of Pensions on Divorce states that the apportioning of benefits pre and post marriage may not be appropriate and will no longer be a relevant consideration where the needs of the couple must be met. The court will look to share the pension assets so that each party has a pension of equal value or to achieve an equal income in retirement. Equal pension value may not, however, produce equal income and this will need to be carefully considered. This means that one party may have to share the total value of their pension, irrespective of the fact a portion of it accrued prior to the marriage.
The starting point is therefore to look at the pension information in its totality so that you can make decisions about whether it should be shared.