Associate James Underwood sets out five essential things to know about how pensions are dealt with on divorce.
Pensions are often some of the most significant assets in divorce cases. But their importance can sometimes be overlooked, especially when parties are understandably concerned about their short-term financial independence and living arrangements.
Thinking about your post-retirement financial independence is however just as important, and this only becomes more pressing the older you are and the longer you’ve been married.
Pensions on divorce is a complex topic, but this article sets out five things to consider as a starting point.
1. The family court has significant powers to deal with pensions
It’s generally not possible for someone to transfer a pension to another person in their lifetime – but the family court has the power to do this when a couple divorces.
These days, the most common order made by the court when it comes to pensions is a pension sharing order. This doesn’t mean that on reaching retirement one party shares their pension with the other. Instead, the pension provider is ordered to carve out a set percentage of the pension so that this can be transferred to the other party.
2. A pension share can be ‘internal’ or ‘external’
That share of the original pension becomes the receiving party’s own pension, for them to deal with as they wish. Any growth on the pension is theirs to keep, but so too are any losses.
Some providers allow the receiving party to invest their new pension in the same scheme from which it’s been carved (internal). Others require the new pension to be transferred to a different provider (external). This is something to think about, and may require input from an independent financial adviser.
3. The value of your pension may not be what you think
It’s important to obtain up-to-date valuations of any pensions early in the divorce process. Anyone with a pension can request the Cash Equivalent Transfer Value (CETV) from the provider. This is essentially the monetary value of the pension.
For defined contribution pensions – most common in the private sector – this figure will generally be the total contributions made plus any growth.
For defined benefit pensions, however, the CETV is only a partial reflection of the value. These pensions are most often found in the public sector; they are complex schemes, and often carry additional benefits which also have value. Working out the ‘true’ value involves a complicated actuarial calculation.
4. You may need a ‘PODE’
For this reason, anyone with a defined benefit pension which is likely to feature as part of the divorce settlement will almost always require the input of a PODE – that is, a Pensions on Divorce Expert.
A PODE is a specialist financial professional who calculates the ‘true’ value of a pension. They can also model different options for how pensions might be shared, and can provide further analysis where needed, such as calculating how much of a pension is ‘matrimonial’ and ‘non-matrimonial’ (depending on the facts of the case, this may affect how much of the pension is available for sharing).
It’s worth asking your family solicitor to instruct the PODE, as it’s important to ensure the PODE is presented with the right questions and information.
5. Timing matters
A pension sharing order can only be expressed as a percentage; the court cannot order a provider to share, say, £100,000 of a pension.
The provider will value the pension on a specific date before carving out the relevant percentage. For this reason, the value of the pension may be higher or lower than when the court made the order.
There are other complex and significant implications to selecting an implementation date, and these need to be considered alongside the timing of the divorce itself. This is another reason to consult a family solicitor.
Pensions are far from straightforward, and require careful consideration. Russell-Cooke’s specialist family team can advise on pensions and all other financial matters arising on divorce.
About James
James Underwood is an associate in the family and children team.
