Pensions can be one of the most valuable assets in a marriage, even in modest asset cases. For high net worth individuals, the value of the pension fund can be even more significant than the matrimonial home, so it is crucial they are not overlooked when getting divorced.
So, what happens to a pension during a divorce? There are three main ways of dealing with a pension in a divorce case and that is through a pension sharing order, a pension attachment order or offsetting.
Offsetting means balancing the value of the pension against another asset, normally the matrimonial home. This is a simple idea but not always ideal, primarily as the value of a pension is not always so easy to determine. For example, a pound in a pension pot might not have the same value as a pound in the bank or in property. This is namely because there are restrictions on when money in a pension fund can be accessed, both in terms of income and lump sum, and there may be tax implications on pension income and in some circumstances, lump sum withdrawals.
It is always advisable to seek advice from an actuary or pension expert on how to calculate the appropriate ‘off-set’ figure and to remember these are different types of assets, one being a future income source, the other a more immediately available resource.
Pension Attachment means that a percentage of the individual’s pension is set aside for the ex-spouse to claim on retirement. This approach carries some risks however and the benefits would be lost if the ex-spouse remarried or the individual died.
Pension Sharing offers a clean break, and allows a percentage share of the member’s pension to be transferred into a pension scheme in the ex-spouse’s name. In most cases, the pension share has to be transferred into a private pension arrangement of the ex-spouse’s choosing and advice is normally required.
There are various types of pension schemes including final salary, defined benefit and public sector schemes all with their own individual rules. The starting point is to obtain the Cash Equivalent Transfer Value (CETV) figure and that will normally require expert advice from an actuary.
Whichever approach is taken, advice will be required to ensure not only the best course of action but also (and critically) the value of the pension.