19 Jun Understanding how pensions are divided during divorce
A person’s pension is often one of their most valuable assets. When a marriage breaks down, the parties will need to divide up all the matrimonial assets between them so that their future needs can be met, this will include any pensions held by either spouse.
What happens to a pension during divorce?
The first step involves disclosing the value of your pensions
Before any negotiations can start, it is important to have a full understanding of the value of all the assets and liabilities of the marriage. To obtain this information, the parties go through a process known as “disclosure”, usually on a voluntary basis or as part of the court directions. The standard disclosure form is known as ‘Form E’.
As part of the disclosure process, both parties will need to disclose the values of their pensions, both state and private. This is the case whether they are still being accumulated, if the party has not retired, or if the pension is in payment.
The importance of a professional investigation into pension value
Because pensions are often valuable assets their values need to be properly investigated before deciding how they should be divided or treated as part of the overall settlement.
Understanding how pensions are valued for divorce purposes
When valuing pensions on divorce, the initial starting point is to look at their capital value, known as the “cash equivalent transfer value” or “cash equivalent benefit value” if they are in payment. To obtain these figures, you can ask your pension company to complete a ‘Form P’ which is a standard pension inquiry form. To obtain the value of your state pension, you can apply online, or use the HMRC app, or by completing ‘Form BR19’. You may also have an additional state pension or protected payment under your State Pension and, to obtain the value of this, you need to complete ‘Form BR20’. Your additional state pension or protected pension can potentially be shared on divorce.
When to seek specialist pension advice
The cash equivalent transfer value of the pension is the starting point for valuing pensions on divorce. If your cash equivalent transfer value is close to £100,000 or above, you will be advised to get specialist pensions advice from an independent financial advisor or, more usually, a pensions actuary. Some types of pensions need to be looked at carefully as the cash equivalent transfer value does not fully reflect the true value of the pension. Typical examples of this are police and firefighter’s pensions.
In addition to checking the value of the pension, the pension specialist will advise how the pension on divorce could be divided to give the parties equality of income and capital on their retirement, or how the value of the pensions can be offset against other assets of the marriage.
Understanding and implementing pension sharing orders
The most common method of dividing a pension is with a ‘pension sharing order’ or by ‘offsetting’ against the value of the pension again other assets.
A spouse’s pension can be physically split if a court makes a pension sharing order. The split is dealt with on a percentage basis, for example 50% of the pension. Once a court order is in force, and the divorce and final order or decree absolute in divorce has been pronounced, the pension sharing order is sent off to the pension providers, who will have four months to implement the pension sharing order.
Once the order has been implemented, the percentage share transferred to you is your pension in your sole name. It is advisable to obtain independent financial advice once the pension sharing order has been implemented, as you may be able to move it to a different pension fund and discuss future contributions that you may wish to make. Once the pension fund is in your name, your ex-spouse has no further dealings with it, and it is unaffected by their death.
Exploring the option of pension offsetting
The other option with pensions is to ‘offset’ the value of the pension against other assets of the marriage. It is advisable to get specialist advice about the value of the pension and its value for offsetting before negotiations start, and this can form part of the letter of instruction to your independent financial advisor or pension actuary. They will be able to advise as to the capital value to be used in negotiations against the other marital assets.
In summary – pensions and divorce
A person’s pension is often one of their most valuable assets during a divorce, it is considered alongside all the other matrimonial assets.
Before any assets on divorce can be divided you need to understand their value, and this applies to pensions as well.
Learn more
Family law solicitors – matrimonial finances.
Divorce solicitors – our services.
Video – Financial disclosure in divorce, what you need to know.
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