Pensions & Divorce - Your Options

Legislation now dictates that the values of pension benefits should be taken into account in matrimonial disputes.  There are effectively four different ways in which benefits can be taken into account.  It is very important that before any decisions are taken full disclosure of all pensions takes place.  You need to write to your pension provider and inform them you are involved in divorce proceedings and ask them to provide their normal package of papers in such a situation, which is to include the current cash equivalent value, along with a note of any pension accrued to the date of calculation of the cash equivalent value.  In addition always ask for “how any pension credit created in this scheme will be dealt with”. 

There are many other questions that need to be asked but these relate to specific pension schemes, most schemes provide the necessary information in a standard format but answers to the above questions will identify whether further information is needed.  Once this information is received, it should be immediately passed to your solicitor for disclosure.  The four ways pension benefits can be taken into account can be described as follows;
 
Disregard
If the pension benefit is of such little value, or in other circumstances where pension benefits are of equal value, then often the best way to proceed would be to ignore pension benefits in any financial settlement.  Never disregard pension benefits unless a pension professional has agreed to such a decision.  Pension benefits can often have great value, often more than anticipated. 

Offsetting
There are several situations and it is invariably the cheapest route to offset pension benefits.  Here the value of pension benefits accrued is offset against other non-pension benefits.  An example might be one party to retain their pension scheme, the other party with no pension to retain the matrimonial home.  If offsetting is being considered it is not necessarily the cash equivalent value of the schemes that needs to be offset, but more often the benefit that the value provides.  It is possible to have two totally different schemes providing significantly different benefits with the same cash equivalent value.  Again before offsetting is agreed always seek advice from the pension professional.   It is very important that future income and expenditure is clearly identified before considering offsetting.   The FSA through their Money Made Clear website have an excellent Budget Calculator.  This can be accessed via http://divorce.moneyadviceservice.org.uk/thinking-about-separation-or-divorce/divorce-separation-tool.html#/introduction

Attachment Orders
Attachment orders, previously known as earmarking orders, allows the court to make an order against the pension scheme, so that when it becomes payable to the member an appropriate amount, after tax, is paid to the spouse.  Attachment orders cease on the death of the member or the remarriage of the spouse.  It is for this reason, that any attachment benefit ceases to be paid to the spouse when the member dies, why this route is often discounted.  It is possible to insure the member, so that should the member die before the spouse an insurance payment is available, however this insurance would need to be throughout life and can prove to be very costly.  Whilst popular when first introduced pension attachment orders are now rare having been superseded by pension sharing.

Pension Sharing
Where a court makes a pension sharing order, an amount of money is moved from the pension of the member to a pension of the spouse.  This movement of money creates a debit in the member’s benefit, and a credit for the spouse.  The members pension scheme has 3 choices as to how they deal with the pension credit.  It is the rules of the members pension scheme that provides this information. 

Firstly the pension credit must stay in the pension scheme with benefits generally only being available at normal retirement date.  This is the case for all Public Sector unfunded schemes, such The Civil Service Pension Scheme and the Teachers Pension Scheme.

Secondly, the pension credit must be moved out of the members pension scheme into an appropriate pension scheme of the spouse.  This is normal for retirement annuities and personal pension plans and many company schemes. 

Lastly, the spouse has the option of deciding which of the above two can be used.  This is the stated position of all Local Government Pension Schemes

The pension share must be expressed as a percentage of the CETV: HvH [2010] FLR 173.  This is the reference to a particular case that is accepted as creating a precedent confirming the legislation.  The reason why this is such an issue is because a pension share is agreed many months, if not years before it is implemented.  Values can move up or down and often parties wish to agree a settlement based on an amount of money.  Unfortunately the legislation is clear that this is not an available option. 

The process for pension sharing is very long.  When completed it is known as being implemented.  A Pension Scheme can only act once it is in receipt of both a Pension Sharing Order, being an Order issued by the court and the Decree Absolute.  The Pension Scheme will then write to both the member and the spouse requesting information and sometimes fees.  It is only once the Scheme has received all its required information that the sharing process starts with the implementation date.  The Pension Scheme then has four months to finalise the implementation of the Sharing Order.  The figures used in any report are already out of date, but it can be seen it will be a long time before any pension share will be implemented.  During the implementation period new figures will be calculated which will always produce different results to those disclosed and used in any report.

During the time from a report until any pension sharing order has been finally implemented then the provision of death benefits, should the member die, can follow several different changing routes dependant on each Pension Scheme’s rules.
 
Care needs to be exercised with pension sharing, particularly for final salary/defined benefit schemes.  It is common for a spouse to want their pension credit to be moved out of the pension scheme of their partner.  This can often be wrong and in many cases if the choice is available the spouse will often be better served by leaving any pension credit in the same pension scheme as the member.  The fact that it stays in the pension scheme does not matter.  Both the pension credit and the pension debit are treated totally separately with the benefit accruing to both parties, completely independent of the other and any decisions taken by the other with regards to retirement. 
Pension legislation now allows benefits to be taken at any time from age 55, regardless of a persons individual circumstances or employment.  However, pension scheme rules can override this position such that, particularly for final salary/defined benefit schemes, the pension might only be available at a specific time.  This is very usual for a pension credit.  Should benefits be available before normal retirement date then it is very rare for them not to be substantially reduced.  A factor of 6% p.a for each year earlier that a pension is taken before normal retirement date is common.