Understanding Pensions in Divorce

Divorce is often a challenging and complex process, with many financial issues requiring careful attention. One area that often causes confusion, and also very often overlooked or not given the significant attention that it should have, is the division of the party's pensions. At Cullimore Dutton, we understand the complexities surrounding pensions in divorce and are here to guide you through this important aspect with professionalism and clarity.

What Happens to Pensions in Divorce?

Pensions are considered a matrimonial asset, and like the family home or savings, they are subject to division when a marriage ends. However, pensions are unique because they are often liquid, meaning they can’t be easily sold or divided. Instead, the value of the pension needs to be assessed and taken into account in the overall financial settlement.

In the UK, pensions are typically divided through a Pension Sharing Order or another arrangement that ensures both parties share the value of the pension fairly.

Types of Pensions and Their Valuation

It’s important to understand the type of pension you have, as this will impact how it is divided. The two main types of pensions are:

1. Defined Contribution Pensions:
   Also known as "money purchase" pensions, these are based on the contributions made by you and your employer. The value of these pensions is relatively straightforward to calculate since it is based on the current fund value.
2. Defined Benefit Pensions:
   These pensions provide a set income in retirement, often based on salary and years of service. Valuing these pensions can be more complex, as it requires actuarial calculations to assess the future income they may provide.

Both types of pensions must be valued accurately to ensure an equitable division of assets. Cullimore Dutton works with pension experts to help ensure the valuation is correct and reflective of the pension’s true worth.

Methods of Dividing Pensions

There are several methods for dividing pension assets in divorce, depending on the type of pension and the specifics of the case. The most common methods include:

1. Pension Sharing Order:
   A Pension Sharing Order allows one spouse to receive a percentage of the other spouse's pension, which is either transferred into their own pension pot or retained within the pension scheme depending on the scheme rules.
2. Pension Offsetting:
   In this method, the value of the pension is offset against other assets, such as the family home or savings. One spouse keeps their pension, while the other receives a larger share of other assets.
3. Pension Earmarking:
   With earmarking, a portion of one spouse’s pension is set aside for the other spouse, but the pension remains with the original holder. The ex-spouse will receive the portion of the pension when it is accessed in the future. This method can be risky, as it depends on the pension holder’s future decisions regarding retirement.

Key Considerations in Pension Division

When dividing pensions, several factors need to be considered to ensure a fair settlement:

1. Age and Pension Access:
   The age at which a pension can be accessed is important. If one spouse is significantly older than the other, they may access their pension benefits earlier, which could impact the fairness of the division.
2. Tax Implications:
   Pensions have tax advantages, and it’s essential to consider these when dividing pension assets. Pensions are generally exempt from capital gains tax, which can make them an attractive asset. Planning for tax efficiency is a crucial aspect of the settlement process.
3. Future Retirement Income:
   When dividing pensions, it’s vital to think about the long-term impact on each party’s retirement income. A Pension Sharing Order, while providing a fair division of pension assets, may not provide the same level of financial security to both parties.
4. Legal and Financial Advice:
   Given the complexities of pensions in divorce, expert legal and financial advice is crucial. At Cullimore Dutton, we work closely with financial specialists, including our own in house Independent financial Advisers, to ensure your financial future is protected.

Also of note, for those who are not married, no matter how long you have been together, you have no automatic right of entitlement to your partner's pension.

How Cullimore Dutton Can Help

At Cullimore Dutton, we are committed to ensuring our clients receive the best possible legal advice on pensions and divorce. Pensions can differ in complexity, particularly public sector pensions, i.e., Police, NHS, Armed Forces, etc. Our experienced family law team will guide you through the pension division process, offering tailored advice based on your individual situation particularly at that time of life when pensions really ought to be under consideration, as it will hugely impact on your lifestyle in retirement and whether or not you have to make major decisions if pensions have been overlooked.

We have experts to ensure you receive an accurate overview and assessment in order to help you explore the best options for dividing pension assets for you. We are here to protect your financial interest, including your pension rights. In many cases, the pension can actually be the most valuable asset in the case.

Whether you are going through a divorce or considering one, we are here to protect your financial interests, including your pension rights.