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A Quick Guide to Pensions on Divorce

A Quick Guide to Pensions on Divorce

sharing a pension following a divorce

When a couple divorce, pensions can often be the most valuable asset in the marital pot after the family home. It is therefore important to understand the different ways a pension can be divided between the parties on divorce and the advantages and disadvantages of each.

Pension Offsetting

Pension offsetting is a ‘trade-off’ between the parties, the member spouse retains their pension which is attributed a value e.g. £250,000. The non-member spouse is compensated by receiving the equivalent value of another asset in the marital pot e.g. her husband’s share of a £500,000 home.

While pension offsetting might seem a straightforward option, it can prove disadvantageous for the non-member spouse who may find themselves with little or no on-going pension rights. Agreeing a valuation of a pension and how to offset can also be extremely complex.

Pension Attachment Orders

When the Court makes a pension attachment order, they direct a pension fund to make certain payments not to the member of the pension scheme, but to his former spouse.

In practice few such orders are made, the main disadvantage being that a pension attachment order does not create a separate pension fund for the non-member spouse and as a result:

  • the non-member spouse has no control over the pension fund or when it comes into payment (as this is dependent on the member spouse’s retirement);
  • there is a risk to the non-member spouse that the member spouse may attempt to frustrate a pension attachment order e.g. by moving pension benefits to another scheme;
  • pension attachment orders lapse on the death of the member and cease on remarriage of the non-member, giving limited financial security on retirement; and
  • the pension scheme member continues to be taxed on the whole of an annuity, including the part paid to the non-member.

Pension Sharing Order

Pension sharing orders split pension rights at the time of divorce. The parties will then have two entirely separate pensions over which they have immediate control.

The Pension Sharing Order states the percentage of the pension which is to be transferred from the member spouse’s fund to a fund elected by the non-member spouse. Transfers can be internal i.e. non-member becomes a member of the transferor’s pension scheme in her own right, or external i.e. non-member transfers to a different pension scheme.

The obvious advantage of pension sharing order is that both parties end up with a separate pension. This enables the parties to make independent decisions going forward about the investment approach, when to retire and adding further contributions. The non-member spouse can also remarry without affecting their pension rights and pension income will be payable at the tax rate of the receiving member.

Author: Aideen McGarry

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Image attribution: Creator attribution: Nick Youngson http://nyphotographic.com/