Pensions, as an asset to be divided up in the event of divorce, can be easily overlooked in favour of more tangible assets such as cash and property when couples are negotiating who gets what. Although this is a particular danger for couples who are close to retirement, it should also concern couples where one spouse, normally the wife, has little or no pension provision.
In December 2000, the rules governing the apportioning of pension assets between divorcing couples changed in an effort to remove some of the inequity inherent in the previous regime which allowed pension offsetting and earmarking. This change added a third option: pension sharing which allows for a proportion of the pension (usually, but not always, the husband’s) to be put into a new, completely separate scheme for the benefit of the ex-spouse.
What are the options available?
The average age of divorce has been steadily rising since the 1970s and is now in the mid-forties for both men and women. At the same time, the percentage of over-sixties divorcing has also risen steadily, reflecting the fact that older women now have greater financial independence and any stigma over divorce has all but disappeared. For both these age groups, the proximity to retirement should make all divorcing couples scrutinise their respective, long term financial provision very carefully.
This option is not governed by legislation and simply involves both parties ‘trading’ assets between them. The most common scenario is that one spouse keeps the family home and the other the pension pot (normally the husband). Although this allows for a clean break, it can compromise the ex-spouse’s ability to make reasonable financial plans for retirement.
This is where a proportion of one spouse’s pension pot is ‘earmarked’ for the ex-spouse. The pension is held by the original member until he or she retires and then the benefits are paid to both parties in the proportions agreed. Generally speaking, this type of pension sharing tends to benefit the holder of the pension, who can govern how and when the benefits can be taken thus potentially affecting their final value, rather than the recipient of the earmarked payments. This arrangement rarely allows for a clean break as ongoing contact is likely to be necessary while benefits are being paid to both spouses.
Since its introduction, this has proved to be the most popular option for the majority of couples filing for divorce after December 2000. In essence, once the pension has been valued (normally transfer value), a proportion is allocated to the ex-spouse which is then transferred into their own pension scheme.
The pros and cons of pension sharing
This allows a clean break and, as each spouse has their own pension pot, future payments are not affected by the death or remarriage of either spouse. In addition, the ex-spouse can take their pension from age 55 rather than waiting until the pension holder retires. This may have significant benefits given the changes due to come into effect from April 2015 whereby those retiring will have greater flexibility when drawing down their pension benefits than simply purchasing an annuity as is presently the case.
However, there are drawbacks: first, the ex-spouse cannot have access to the lump sum benefits; secondly, any proportion of the pension pot will be traded against the non-pension assets; and thirdly, there is a four month window within which the ex-spouse’s pension scheme must be implemented, a period during which the pension-holder retains control of the assets and thus the opportunity to delay (or even abort) implementation.
Pension sharing is a welcome addition and enables the less well-off spouse an opportunity to provide for the future without remaining dependent on retirement decisions made by the pension-holding spouse. Nonetheless, it is important that the ex-spouse ensures that pension sharing does not inhibit their ability to manage financially until their pension is payable. Although on the face of it a pension sharing arrangement seems straightforward, there are pitfalls for the unwary. For instance the death of the pension-holder before the ex-spouse’s new scheme is implemented could result in no benefits being paid. There are many a slip twixt cup and lip when negotiating financial settlements and all divorcing couples, particularly those trying to negotiate matters themselves and those using mediation, should seek professional advice before agreeing to anything.