What happens to pension in divorce?

Asher

Hello,

Is there a legal rule of thumb about what happens to a company pension upon divorce? Or is it all sorted out on an individual basis? I will give quick outline, couple in their 50s, three grown up kids all working, husband works full time earns £60k a year, wife works part time earns about £8k, house all paid for worth about £400k. Both want to part sell the house and have half each, wife willing to work full time if necessary (not expecing maintenance as kids grown up). What happens to his pension pot?

EdInvestor

It can be subject to "pension splitting" and the wife will usually be wise to pursue this as the pension pot is frequently worth considerably more than the house.

ReportInvestor

I agree with Ed. And astonishingly pensions have often been left out of settlements :eek:, adding to female retirement poverty. Which would definitely be the case in the situation you decribe.

Since 2000 the law makes it possible for pensions to be divided between divorcing couples. A wife may be awarded a transfer value of half of her husband's accumulated pension fund, which can be put into her own pension.

More details on this IA link - Financial matters after a split

CIS

Remember that the wife could also apply for splitting of the State Additional Pension on top of the normal state pension for divorcees.

dwsjarcmcd

As alternative to the above, there could be an agreement that the wife gets more equity in the house, or additional savings to offset the value of the pension. Subject of course to EdInvestor's comment on the value of the pension being more than the house

hilstep2000

I said I didn't want half of my ex-husbands' pensions, but I got the whole house instead!

ReportInvestor

Yes. It can be a bargaining counter & it sounds like you used it well .

It's important to be aware of just how valuable a bargaining counter it is, especially if it's one of these "gold dust" final salary schemes that companies are closing down because they can't afford the ever growing liabilities.

EdInvestor

To work out roughly how much a final salary pension is worth, multiply the amount by 25.

eg 10k p.a. pension, pot value c. £250,000.

jonathon_hart

Ed - the government proscribed multiple for testing against allowances is 20.

There are essentially 3 options:

1. The pension is traded of for other assets (as above one gets the pension, one gets the house)

2. Earmarking orders. This is where part of the pension is marked as going to your spouse and this comes into effect when you retire.

3. The pension is split so that you and your spouse effectively have their own pension created from your original pension.

Your solicitiors should be able to explain this better than me though!!

Thanks

Jonathon

Sharpie

Hi Asher,

This is a complex area and it is vital that the couple seek proper advice. Too many woment take the home because they think that "pensions are too complicated" (or have young children), and then find they have nothing to live on in retirement.

Your couple should get a basic state pension forecast (send off form BR19 downloaded from internet, or do it online at https://secure.thepensionservice.gov.uk. She may find she has more state pension than she thinks as she may have received Home Responsibilities Protection when she looked after the kids. Her state pension can also be augmented by substtuting her husbands NI record for her own on divorce (at no cost to him). This is done quite easily.

As Jonathan said, there are three ways of looking at the pension.

Offsetting
Offsetting is probably the most straightforward (but not necessarily the most satisfactory) route. This means that the transfer value of the pension fund is taken and offset against another asset, normally the marital home.

Advantages

• Offers a clean break
• Is relatively straightforward
• The wife has access to her share of the assets immediately.

Disadvantages

• No long term retirement planning taken into the equation.
• Good Pension funds have outperformed property on average over the last 30 years (believe it or not!)-is this an equitable outcome?
• Property is more expensive to manage. There are costs involved (solicitors fees and potential stamp duty) on downsizing. In addition, all of the assets are in one “basket”.

Earmarking (Attachment Orders)

Earmarking orders placed on a members pension, means that a proportion of the pension is “earmarked” for the former spouse as a result of a divorce settlement. An earmarking order can (in theory) be applied to the tax free cash lump sum, the pension income or the death in service benefits.

Advantages

• In this case, the benefits provided by final salary pension are (currently) guaranteed to provide a proportion of the husbands salary in retirement.
• This guaranteed income is inflation proofed.
• Benefits are not linked to the stockmarket.
•
Disadvantages

• The earmarking order ceases if she remarries or her husband dies She is then left with nothing.
• She cannot receive the benefits until her husband chooses to retire.
• This does not offer a clean break, and he has control over the pension position. He could for example, choose not to build up further benefits (by opting out of the pension, and starting a new post divorce scheme), or to retire later.
• Earmarking orders can be varied later, or discharged completely.
• The pension income is taxed at the members highest rate of income tax. Therefore if her husband is a higher rate taxpayer in retirement, then he has to pay tax first prior to her receiving her pension income.
• The administration can be a headache.

Sharing/Splitting

Pension sharing allows a members pension to be shared or split up, so that she has a pension "pot" in her own.

Advantages

• Pension sharing offers a clean break, and a fairer overall settlement of assets.
• She has control over her assets, even if she remaries or her husband dies.
• She has control over how and when she takes the benefits

Disadvantages

• Potential loss of a guaranteed, inflation proofed income.
• Investment risk- this needs to be controlled.
• Can be more time consuming to implement.

Another factor is how rich is the final salary scheme? Does it have enough money to be able to pay out pensions in future years?

Also, EdInvestor mentioned the rule of thumb about valuing a final salasry pension scheme. This does not apply to pensions on divorce for various reasons. You have to have what's called a Cash Equivalent Transfer Value (CETV) which gives an indication of the fund value. In many cases this is not correct because it does not include, however, incidental payments, discretionary increases, widows or dependants pension, future increases in earnings, and the scheme funding levels ..sometimes, I recommend that my clients have an independent valuation.

Also, you need to consider the equalisation of income in retirement as well (sometimes either party needs more of the pot, so its not necessarily a 50/50 split)

There are so many factors to consider (splitting contracted out benefits, valuing contracted out benefits, critical yields, investment risk etc), which I can't mention here- seek advice from a qualified pensions specialist IFA- Solicitors are not authorised to give advice in this area, and you need financial advice before the process starts.

Anyway- hope this helps!

EdInvestor

jonathon_hart wrote:

Ed - the government proscribed multiple for testing against allowances is 20.

Is it not 25X for pensions in payment? I mention this only so people have an idea of whether the pension has a sigificant value or not.As mentioned and particularly with F/S schemes, valuation is complex.