Commonly when a married couple decide to separate one of the first questions they ask themselves is, “what is going to happen to the family home?” as this is often the most valuable asset to the couple. What happens to the home and the equity within it has huge implications for a family. Other questions may include “what money do I need for my children?” and “what will we do about our debts?”. These questions are vitally important and relevant in the context of divorce. However, a key resource which can often be overlooked by a married couple getting divorced is pensions.
The need to sort out pensions may not be part of an individual’s initial objectives when getting divorced. This may stem from a belief that pensions should simply be left alone. Alternatively, the spouse with the larger pension pot may feel that their spouse should not be entitled to a share of their pension as they have not “worked for it”.
However, in the eyes of the law pensions accrued during the length of a married couple’s relationship must be taken into account when dividing assets on divorce. Put simply, it does not matter who has managed to accrue more money in a pension fund during the marriage as it is by virtue of how the married couple have agreed to manage their finances that has enabled that person to do so. A common example of this is where a married couple decide to start a family together and one parent takes a career break to care for the children. Once the children are of school age the couple may agree that the stay at home parent will return to work part-time so that he or she can juggle work and family life whilst enabling the other parent to remain in full time employment. Is it fair that if that couple were to separate in the future, the parent who took the career break should suffer the financial consequences as a result of a decision they made as a couple jointly? The law clearly says, no.
Many separating couples do understand that they each have pension claims on divorce. However, there are situations where one of the parties may be too quick to offer a solution whereby the person with the smaller pension will simply take more capital from elsewhere to “balance the books”, such as the family home. This is known as an off-set. Whilst this can be a very pragmatic solution for both parties in order to reach a financial resolution on divorce, not least because it can avoid hefty pension charges, it should not be decided in haste. Pensions and cash are not necessarily seen as being pound for pound and pensions can be extremely valuable not only as income generators but also capital resources. Following the ‘pension freedoms’ in April 2015, pensions can be utilised in a much more creative way than previously was the case and they can be a valuable way of planning for one’s retirement and/or providing a tax efficient savings tool.
In cases where it is advisable for pensions to be shared on divorce as opposed to a capital offset, the person with the larger pension fund will have a percentage of their pension transferred into a scheme in the name of the person whose pension is smaller. This is known as a pension sharing order. Alternatively, a proportion of a spouse’s pension can be paid to the other spouse known as a pension attachment order, however this is extremely rare.
Whether pensions should be left alone, offset or shared on divorce, it is important to seek expert pension advice as part of the divorce process to ensure that you fully understand the consequences of the options available to you and the advantages and disadvantages of each.
At Consilia Legal, we have a highly experienced team who specialise in advising clients on divorce where pensions are involved. We will work with you and your chosen financial adviser to negotiate a settlement with your ex-partner based upon your specific needs and objectives.