Pensions are in the news again following the demise of the national retailer, BHS. As family solicitors, we are regularly dealing with them – particularly with the question of what to do on separation.
They are a tricky subject and one which can be very emotive. A pension can be one of the biggest assets from a relationship – worth hundreds of thousands of pounds. In the old days pensions were hardly considered in divorce proceedings. Even if the pensions had been considered as an ‘asset’ in the marriage, it would have been retained by the scheme member, because of limits on what could be done with them.
Prior to December 2000, the only option available to the court was to ‘earmark’ an amount from the retirement benefit that would only be paid out when the recipient reached the retirement age of the scheme member. This caused problems for the divorcing couple, not least because both parties had to wait until retirement age for the settlement to finally be completed. This could sometimes take years, if not decades.
Later however, under the Welfare Reform and Pensions Act 1999, ‘pension splitting’ – essentially giving a certain percentage share to the divorced spouse – became available to family courts. This ‘split’ occurred at the time of the divorce, rather than some point in the future.
‘Pension splitting’ has since become known as ‘pension sharing’ and is now open to those in dissolved civil partnerships as well as divorcees.
So how do you decide how to share a pension, particularly if there is more than one fund involved? First, the relevant parties must disclose the value of any pension to the court. No decision can be properly made without this and anyone being asked to agree details of a financial settlement, without figures, is putting themselves at real risk of not getting a fair share of all of the assets. If there are questions about the valuation figures being provided by the fund there needs to be a re-calculation.
Solicitors are not financial advisers and there are situations when we needed from a pensions expert. They will look in detail at pension funds and recommend what to do. It makes good financial sense to bring them in early when the funds are worth a lot to both parties. Some funds such as public sector schemes or defined benefit funds need more in-depth investigation. If it is important that sharing the fund provides the same income to both couples they can provide their opinion to achieve this. If the fund has built up before the relationship or after it has ended they can look at what proportion could be saved from sharing. There are, of-course, other complexities if the fund is based in a foreign country or there are a number of different funds.
In situations where couples choose not to share pensions, the fund’s value is often used as a ‘bargaining chip’ to argue a greater share of other assets. A pensions expert can recommend what that value is worth in money terms.
It is not only those private funds that are relevant when separating. Don’t forget the state pension scheme! On 6 April, changes were made to pension entitlement, dependent on when you reach state pension age - the new rules apply to those who reach state pension age on or after 6th April. The changes not only affect entitlement but what can happen on divorce or dissolution of civil partnership.
The state pension is particularly relevant for those who are older and have lengthy marriages. Under the old rules a spouse could claim their ex’s national insurance contributions and increase their own state pension entitlement on divorce. This didn’t affect the ex’s pension but the increased pension is lost if that party re-marries or enters into a new civil partnership before getting to retirement age. Under the new rules the ability to claim these additional contributions has gone but pension sharing of the additional state pension is an option. Accepted – state pensions are limited in their value but they are important.
If you are currently going through a divorce, it is important not to be turned off by talk of pensions. Yes they can be complex and confusing but they can also be worth a lot of money – sometimes significantly more than first thought.
Pensions determine our retirement lifestyles and cannot be ignored. There is, after all, life after separation. Look at them carefully and give yourself the best chance of making a good informed decision. Get advice – financial and legal. It could save you or get you significant benefit.
By family and divorce solicitor, Mandy Rimmer
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