This week’s blog has been written by our good friend Emma Newman, from Stowe Family Law, which is not part of Oakwood or Openwork.
Pensions are often the second-largest asset, behind the family home. Dealing with pensions in a divorce can be a complex area. Specialist family lawyer, Emma Newman from the Stowe Family Law office in Esher explains the different ways to deal with a pension in a divorce.
Reaching a financial settlement when a couple divorces or dissolves their civil partnership can be a daunting task. It involves the consideration of the couple’s assets including any pensions.
How are pensions calculated in a divorce?
Pensions are a rather unique asset. They are often treated like a savings pot but the funds cannot be accessed unless the pension holder reaches a certain age. At this stage they can draw a tax-free cash lump sum and begin drawing their pension. In many cases, this leads to the pensions being treated in the abstract – just numbers on a page.
Those typed numbers are certainly not as black and white as they might appear. Sadly, unless specialist help is obtained, this can lead to the risky distribution of pensions or the trading of pensions for other assets based on the quoted value. This is potentially catastrophic in retirement and can be fundamentally unfair for one spouse.
How are pensions dealt with in a divorce?
There are a number of ways to deal with a pension including ‘pension sharing orders’ and ‘pension attachment orders.’ However, it is important to understand the implications, not just for today but for the future when deciding how to treat a pension pot.
Pension sharing order
A pension sharing order within a financial settlement provides the instructions to a pension fund to extract a specific percentage from a fund and transfer it either to a different fund (external transfer) or to an account managed by the same fund (internal transfer).
Once such an order has been implemented, the parties can usually contribute to this fund, ‘drawdown on’ it (i.e. withdraw money) and generally deal with their pension as they choose to, without impacting on the other party’s fund.
The appropriate percentage that is transferred will need to be calculated, in most circumstances, by a pension expert.
Pensions attachment order
You can receive part of your ex-spouse’ pension, income or lump-sum but only when it starts being paid to them. If the pension holder dies, the surviving party’s income from that pension fund will cease.
Offsetting is when the value of the pension is offset against other assets. For example, a spouse may relinquish a claim over their spouse’s pensions, in favour of keeping the whole house.
When calculating the appropriate ‘off-set’ figure it is important to appreciate that a pound in a pension pot is not the same as a pound in a bank account or even a property.
There are various reasons for this, including the fact that there are restrictions on when money in a pension fund can be accessed, both in terms of income and a lump sum. There may be tax to pay on pension income and in some circumstances, lump-sum withdrawals as well.
It is always advisable to seek advice from a pension expert or actuary on how to calculate the appropriate ‘off-set’ figure. If you choose to take this option you should always remember that you are comparing two different types of assets, one a future income source, the other a more immediately available resource.
How do you split a pension if you have already retired?
Even if you’ve already retired, it does not prevent pensions being shared. However, as they’re in payment, they are classed as an asset and an income source and need to be treated carefully. This makes seeking expert advice from a pensions expert and a solicitor all the more vital.
The best way to deal with a pension in divorce
The answer is to tread carefully. Gather the right information. Take the advice of a pension on divorce expert/actuary in conjunction with the advice of your solicitor.
This will allow for informed decision making, minimisation of risk and leads to fairness and peace of mind.
Given the value of pension assets and the intricacies of certain schemes, it is important that the right questions are asked to ensure that the pension resources are divided in a fair way.
At Stowe Family Law, our solicitors regularly deal with cases involving valuable and complicated pension assets and regularly work with pension experts to ensure that a fair outcome is achieved.
To contact Emma or to speak to a specialist family and divorce lawyer please call 0330 404 6069 or visit the Stowe Family Law website.
This is for general information purposes only. Stowe Family Law is not part of the Openwork offering and this information is offered in our own right.
Openwork Limited accept no responsibility for this aspect of our business. Solicitors are not regulated by the Financial Conduct Authority.