Pensions and divorce

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A good family lawyer will know when not to advise on a specific area and that is why the Family Team at IBB forges relationships with financial planners like Philip Harper at Financial Management. Philip’s view is that it can be difficult to make good financial decisions in the midst of emotional turmoil, so the best advice is to do nothing without surrounding yourself with professionals who can help. Rethinking your long-term financial goals, making the most of your savings and ensuring your investments, life and health policies and pensions are shared and re-instated as tax-efficiently as possible.

Financial planning

Those going through a separation can be forgiven for wanting to temporarily set aside thoughts about retirement for another time. However, as the value of a person’s pension scheme may be their most or second most valuable asset, creating a financial plan to guide you through this difficult stage will not only improve your chance of reaching retirement in a good financial state but will also help your emotional well-being.  Philip’s financial expertise is wide reaching but he has a specialism in respect of pension funds.

Expert reports

In the majority of divorce cases handled at IBB Law, the pension funds are such that we would advise our clients to instruct a pensions expert to provide an actuarial report. The actuary is usually instructed as a Single Joint Expert so acts for the Court and not the parties, with the costs of that report being split. Upon receipt of that report, we direct clients to financial planners like Philip to apply the findings of the report and provide tailored advice.

How the Court deals with pensions on divorce

In the course of divorce proceedings, the Court can deal with pension assets in three ways: Pension Sharing Order (“PSO”), Pension Attachment Orders (“PAO”) and Offsetting.

Pension Sharing Orders are the most common method of sharing pensions on divorce. They allow the Court to direct the pension adviser to divide the rights under a pension scheme, so that each spouse would have their own independent rights under that scheme or indeed require transfer to a totally new scheme.

Pension Attachment Orders enable the Court to direct the pension provider to pay regular payments, a lump sum or lump sum death benefit at the time these benefits become due to the other spouse. The payment can be for periodical payments, secured periodical payments or lump sums. There are however limitations to PAO’s and that is why they are infrequently used. In brief they are capable of variation, they prevent a clean break, a member could move pension benefits around much more easily and a member could delay or bring forward retirement possibly to the detriment of the other spouse. They do not create a separate fund for the member and any periodical payments order lapses on the death of the member or on the remarriage of the non-member, giving limited financial protection.

Finally, the Court can entertain offsetting which would allow one party to retain their pension fund in favour of the other spouse retaining a greater share of other matrimonial assets. However, this is fraught with difficulties when parties try to calculate the level themselves because they may be significantly disadvantaged in the retention of one asset over the other and therefore, expert pension input is always advised.

During uncertain markets, values can be distorted, so being able to look at trends and understand the history and forecasts can be important.  A financial planner will be able to explain this to you clearly.

Recent cases

In terms of any recent family law cases involving pensions, the recent case of W v H (divorce financial remedies) [2020] EWFC B10 reminds that that there is no “one size fits all” approach with pensions. The Judge in that case concluded that in a “needs” case, where the parties are nearing retirement and defined benefit schemes are involved, equal sharing of pension income is more likely to be appropriate than equal sharing of pension capital. He also stated that it may not be appropriate to exclude pension accrued prior to the marriage in needs cases and, finally, that Offsetting should be avoided where possible.

What we learn from this is that in some circumstances it is now wrong to ring-fence pre-marital pension accrual when dealing with a needs case. We cannot do it automatically with other capital assets, in the absence of nuptial agreements, so should not be doing this with pension assets.

Similarly, the Judge found that equalisation of income is more likely to be appropriate for couples nearing retirement as opposed to equalisation of capital fund.

Finally, offsetting should be avoided. This means that even if offsetting is agreed, the Court may question the fairness of the agreement when making an Order which makes such provision.

Expert advice

If you require expert advice on pensions on separation and/or in respect of financial planning advice, please contact Jolene Hutchison of IBB law or Philip Harper at Financial Management.