What can you do with a pension on divorce?
Please note that references in this article to marriage, divorce and / or spouse apply equally to the dissolution of a civil partnership and / or civil partners.
For many people, particularly since the introduction of compulsory workplace pension savings in 2012, pensions are fast becoming a very valuable asset. Despite this, a recent survey undertaken by Royal London (one of the biggest pension companies in the UK), found that around four in five people do not fully understand how their pension works and / or the benefits that their pensions will provide them with at retirement.
With that in mind, it is not surprising that when it comes to considering pensions on divorce, many couples find it daunting to start conversations about what should happen with their pensions. This concern is often amplified for those who divorce prior to retirement age and are therefore, understandably focused on how their divorce is going to affect them in the here and now, rather than into retirement (which could be years or potentially even decades away). A recent study of divorces in England has found that of the cases studied at least 80% of them involved considerable pension assets but of those cases only 14% resulted in specific orders being made in relation to pensions. All of this demonstrates that there is a huge need for clear and open advice on what can be done with pensions on divorce and what each option really means in practice both now and in retirement.
As a result, if you are currently trying to work through what can be done with the pensions you and your spouse have, do not despair, help is on hand.
What options do you have when it comes to dealing with pensions on divorce?
Just like other assets, the fact that pensions belong to one person at the start of a divorce does not make a difference. This does not stop the court from being able to make orders in relation to pensions. The order that it is appropriate for the court to make will differ from case to case and will very much depend on the particular pensions involved, as well as your particular circumstances. Below are some of the more common orders that the court can make:
- No order – In some cases, the most appropriate financial settlement results in everyone keeping their own pensions and, therefore, no pension orders being made by the court. This is most common in cases where couples have been married for a very short period of time and are at the outset of their working lives. In those cases, the pensions accrued are likely to be minimal and as a result, the costs of seeking to do anything with them will outweigh the financial benefit of any potential orders that could be made. That being said, in the vast majority of divorces, this will not be the most appropriate outcome, particularly as it can lead to considerable inequality.
- Pension attachment order – These types of orders provide that once a pension goes into payment a set amount of your spouse’s pension will not be paid to your spouse, but instead will be paid directly to you (or vice versa). This can apply to both lump sums drawn out of a pension, as well as to pension income. The downside to these types of orders, however, is that the pension capital remains invested in your spouse’s pension so you have no control over how this is invested or when this is drawn down. This can lead to situations where underhanded ex-spouses actively choose not to drawn down their pensions to stop their ex from benefiting from the orders made. Pension attachment orders, automatically end on remarriage, as well as if the pension holder dies. As a result, the moment there is a remarriage or your ex-spouse dies, the benefit of this type of order immediately ceases. Given these difficulties, the cases where such orders are appropriate are extremely rare.
- Pension sharing order – Since its introduction in 2000, pension sharing orders have become the most frequently made order in relation to pensions. Under these types of orders, a set proportion of a pension is taken from one spouse and invested into a wholly separate pension pot in the name of the other spouse. There is no limit on the number of pensions that can be shared in this way, so if you / your spouse has a series of pensions then it may be appropriate for orders to be made in relation to each of these. Alternatively, it may be appropriate for one order to be made against the largest pension, with the relevant percentage of that order being adjusted to ensure that the values of all pensions are accounted for. The appropriate proportion of any pension sharing order will be dependent on the particular circumstances of each case, but it is usual for the court to aim to achieve equality of the income that pensions will produce in retirement. That way both spouses will exit their marriage with the same resources available to them. Although it should be noted that what each person actually has available to them in retirement will be dependent on any future pension contributions made and / or the performance of their pension savings in the investment markets. Ultimately, whether or not spouses choose to use their pensions to provide an income in retirement (ie through the purchase of a traditional annuity) or whether they choose to take advantage of the pension freedoms now available, is a matter for them. As a result, before making orders of this nature, it is commonplace for the court to seek the specific advice of a pensions on divorce expert.
- Offsetting pension value / benefits against other assets – Finally, the Court can decide that the appropriate arrangement is one that provides for someone to receive one type of asset in return for the other keeping the majority or all of their pension. Most commonly, this type of ‘offsetting’ arrangement is made either where there are surplus capital resources after everyone has been housed or where the resources of the couple are so limited, that all of the available capital is needed for one person to house (usually with the children of the family). Offsetting calculations are very complex as trying to compare the benefit of liquid capital to that saved in a pension is like comparing apples and pears. It is widely accepted that £1 of cash is not the equivalent of £1 in pension savings, but there is a huge level of disagreement even amongst experts as to what the appropriate set off figure is. This will be largely dependent on the other asset being ‘offset’ against as well as the particular pension being considered. As a result, once again before making orders of this nature, it is commonplace for the court to seek the specific advice of a pensions on divorce expert.
What happens if I have been saving into my pension for years prior to my marriage? Will this be taken into account?
Just as with other types of assets, it is possible to argue that certain aspects should be ring-fenced or discounted to take into account the value that asset had prior to your relationship starting. The extent to which this is something that you may want to consider, will be dependent on the level of contributions that were made in this ‘pre-marital’ stage. For example, if you married aged 21 having made three years of pension contributions at the minimum level for your pension, the likelihood is that the value of your pension that can be attributed to these contributions will be minor. If, however, you married at age 41 having made 20+ years of pension contributions the position is likely to be very different. The specific calculation of the proportion of your pension’s value that is attributable to such contributions is complex and would need to be assessed by a pensions on divorce expert. Although it should be noted that the court will only consider these types of ring-fencing / discounting arguments in those cases, where there is still sufficient pension resources remaining to ensure that everyone’s needs in retirement can be met.
What happens if one or more of our pensions is already in payment?
The fact that a pension is in payment does not stop the court from being able to make orders outlined above. What it does mean, however, is that the pension benefits will be known so there will be a lot less uncertainty and far fewer assumptions made about the benefits that the pension provides. It also means that the pension will be accessible, so there may be greater options to draw down additional capital from pensions to assist with housing, as well as everyone’s income needs in retirement. In many ways, therefore, there are more options to consider when pensions are in payment than compared to those that are a distant thought.
There are, however, some potential traps that it is important that you are aware of if pensions are in payment:
- if you are the person who is likely to receive the benefit of a pension order over your spouse’s pension, the most important thing to ensure that your spouse does not empty their pension of all of its value. With the introduction of pension freedoms, if a pension holder has reached their retirement age it is possible for them to withdraw all of the funds held within their pension and spend these recklessly. Whilst there are steps that can be taken to recover such funds through emergency injunction proceedings, these are very costly and stressful. It is, therefore, always better to ensure your position is protected from the outset by seeking a legally binding assurance (called an undertaking) from your spouse that they will not withdraw their pension until matters are fully resolved between the two of you. That way, if your spouse then does try to do anything untoward with their pension you can take immediate steps to enforce the assurance they have provided. It is also prudent to ensure that the relevant pension company is served with formal notice of your divorce and the potential for pension orders to be made. This is something your solicitor should do for you as a matter of course; and
- If you are the pension holder and a pension sharing Order is made against your pension as part of any divorce settlement, you could be subject to a ‘clawback’ by your pension provider for any sums that have inadvertently been overpaid to you, whilst the pension sharing order is implemented. Depending on the size of your pension and the pension sharing order made, these clawbacks can be very significant. Whether it is appropriate for you to share this liability with your spouse will be dependent on the situation between the two of you and in particular, whether you have both benefited from the over payments received. However, in order to share the burden for this liability it is something that must be included within the terms of any settlement reached with your spouse. Otherwise, your pension company will seek to recover the entire overpayment from you and you will have no recourse to your spouse.
Pensions are extremely complex, so it is vital that if you are concerned about your situation and would like some further advice about what it is best to do with yours or your spouse’s pension, then please contact a member of our specialist family team who will be able to assist you.