Answering Questions on Pensions and Divorce
Remember, this site provides general information only and represents our understanding
of the current legislative provisions in relation to pensions and divorce. If
you can't find the answer to your specific question, please contact
us with your question or to arrange an appointment to discuss your personal
circumstances.
The treatment of pension rights on divorce has become a major political issue.
The Government has accepted the principle of a clean break of pension funds on
divorce and legislation on this came into effect in December 2000.
There are three main options in respect of pension rights in a divorce settlement.
Earmarking
This is also known as deferred
maintenance or attachment, and became law in the Pensions Act 1995. It became
effective for divorce petitions from 1 July 1996, though only retirement lump
sums were affected immediately. Attachment orders apply to pensions in payment
only from 6 April 1997.
In England and Wales, earmarking allows the court to require pension scheme administrators
to pay directly to the ex-spouse:
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Up to 50% of the member's pension |
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Up to 50% of any lump sum payable on retirement or death immediately. |
In Scotland, only lump sums may be earmarked for the ex-spouse, not pension payments.
There are few obvious benefits, other than to the Government. Alternative methods
of pension splitting may be costly for it in respect of unfunded public sector/civil
services schemes.
There are several drawbacks for the ex-spouse. Any Pension awarded under an attachment
order:
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Becomes payable only when the member draws the
pension |
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Will be delayed if the member continues to work after normal
retirement date and defers their benefits |
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Does not start if the member dies before retirement |
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Stops if the member dies in retirement |
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Will be taxed at the rate applicable to the member |
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Ceases if the former spouse remarries |
Deferred maintenance gives an ex-spouse an insurable
interest in the member. She (or he) may consider family
income benefit, term
assurance or a whole-of-life Plan.
Independent financial advice can resolve many, if not all, of these issues. As
for a clean break, both divorcing partners will need financial advice to make
up the lower than planned benefits they will now look forward to.
The Financial Services Authority does not regulate all family income benefit
and term assurance contracts.
Equivalent Value
This method, also known as a "clean break", is compulsory in Scotland
and used widely in England and Wales, and involves valuing the pension rights
accumulated during the marriage. They are included in the total value of the
assets to be split. Pension rights are therefore traded off against other assets.
The member's pension scheme is legally obliged to provide no more than the cash
equivalent transfer value. Problems arise in taking the future expectation of
the pension into account as the courts are given little guidance in considering
possible factors such as length of marriage compared with length of scheme membership
and future salary or contribution changes etc.
Whilst equivalent
value resolves pension issues immediately, the other marital assets may be
insufficient to match the value of the pension. Surrendering other assets may
cause hardship to the member.
Where there has been a cash settlement, the ex-spouse will need independent investment
advice. It is extremely important to maintain and build up funds to compensate
for any loss of pension rights.
Pension Sharing
This process, also known as pension
splitting, has been available from December 2000. It involves a share of
the scheme member's rights within the scheme transferring to the divorcing spouse.
The ex-spouse could then either retain benefits within the scheme or transfer
them out, for example, to a new personal pension plan.
An advantage is that the ex-spouse is given control over his or her share of
the pension rights, and the pension split is resolved immediately.
However, unless the ex-spouse elects to transfer his or her entitlement out,
there is ongoing administration of the two portions of the scheme.
Either way, both divorcing partners will need financial advice as to the lower
than planned benefits they will now look forward to. An analysis of the shortfall
which may be expected in retirement income should be carried out. Recommended
levels of funds can be provided, either by way of a personal
pension plan or additional
voluntary contributions.
Remember, this site provides general information only and represents our understanding
of the current legislative provisions in relation to pensions and divorce. If
you can't find the answer to your specific question, please contact us with your
question or to arrange an appointment to discuss your personal circumstances.
Hedgelands Financial Services Ltd, Hedgelands, Abbotskerswell, Newton
Abbot, TQ12 5PW
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Telephone
0845
165 1280
General Insurance
0845 165 1281
Fax
01626 332622
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