Pensions & divorce

A pension can be the biggest asset that a husband and wife own. Often the true value of the pension is not recognised, either because the pension is in payment and is therefore treated as a source of income by the couple or because the husband and wife have not checked the annual pension benefit statements to see how much is in the pension fund.

Research by Scottish Widows shows that 71% of divorcees do not take pensions into account when dividing their assets. That statistic shows just how important it is to take the advice of a top London divorce solicitor before reaching a financial settlement.

The value of pensions

Even if a divorcing husband or wife knows that their spouse has a pension fund it is often assumed that the spouse cannot make a financial claim against the pension fund because it is not a joint pension. Pensions are never jointly owned and, under divorce matrimonial legislation, a husband or wife can claim a share of their spouse’s pension on divorce.

In my experience it is often said by either a husband or wife that the pension assets can be ignored when reaching a financial settlement for a whole variety of different reasons such as:

• The pension fund is only small; or
• The couple both have pension funds with about the same amount of money in them so they do not need to be taken into account; or
• The pension is in payment so cannot be shared.

In the view of the best London divorce solicitors none of these reasons justify ignoring pension assets.

How to value pension funds

A London divorce solicitor will value a pension by ascertaining what the cash equivalent value of the pension fund is. That is because that is the valuation method used by the family court.

Sometimes a husband or wife will think that the pension is not worth a great deal but if the pension is shared between the husband and wife each share will continue to grow and ultimately on retirement may be worth far more than the husband or wife envisage. Pensions should therefore not be ignored at the time of negotiating a financial settlement.

Comparing the value of pension funds

I tend to find that if a couple do think about the value of their respective pension funds when divorcing they compare the pension cash equivalent transfer values, and if they are broadly similar, agree to keep their own pension funds. Whilst to non-London divorce solicitors that might sound like an eminently sensible approach it is not necessarily the right thing to do. That is because the pension cash equivalent transfer value is not always an accurate reflection of the true value of a pension fund.

Imagine the scenario, a husband and wife are getting divorced and each has found out that they have individual pension funds with a cash equivalent transfer value of £500,000 , so a total pension pot value of 1 million. On the face of things and without the best London divorce solicitors’ advice the answer is simple. Keep what you already have.

However the husband's pension pot consists of a private pension fund and the wife's pension is a final salary pension scheme. So if an actuary or an independent financial advisor were to analyse the funds they may well conclude that the cash equivalent transfer value of the wife's pension fund is understated as her pension will produce a better income on retirement than the husband's pension pot. The financial settlement answer might be to give the husband some of the wife's pension fund by way of a pension sharing order or to give the husband more of the savings or investments.

Every family situation is different and it is always necessary to carefully consider pension fund values, for example, if in the above scenario the husband's £500,000 pension fund was in a SASS pension that owned commercial property it might be necessary to look at how long ago the commercial property was valued as the property value in the pension fund accounts might not properly reflect the current value of commercial property. Therefore the figure in the pension accounts might be artificially lowering the cash equivalent transfer value of the husband's pension fund.

Pensions that are in payment at the time of the divorce

If a husband or wife have drawn down on their pension and are getting a monthly retirement income it is often assumed that the pension cannot be shared as it is too late. That is not the case. Pensions that are in payment can be shared but expert advice from a London divorce solicitor and financial advice is required to double check that the pension scheme rules allow a younger spouse to elect to draw his or her share of the pension pot rather than wait until they are 60 or even 65.

I am often asked if there is any need to share pensions if spousal maintenance is going to be paid as, after all, what does it matter if the income a spouse receives is spousal maintenance or a share of the pension fund.

Top London divorce solicitors always urge caution over accepting spousal maintenance instead of a share in a spouse’s pension. That is because spousal maintenance always ends on remarriage or on the death of the spouse paying the spousal maintenance. Furthermore the spouse paying the spousal maintenance could apply back to court to stop the spousal maintenance payments, for example, as a result of a change in their financial circumstances or the cohabitation of the person receiving the spousal maintenance payments. By way of contrast if a pension sharing order is made it cannot be changed by an application to vary the court order and the pension payments will not cease on remarriage or the death of the spouse who was ordered to share his or her pension.

How can OTS divorce solicitors help?

If you are facing a separation or divorce  or are in the midst of family mediation sessions to help you reach a financial settlement you may need expert legal advice to help you understand your financial settlement options and, in particular, your legal options in relation to pension funds. Pensions are complex investments so it pays to take expert advice from a top London divorce solicitor to make sure that the value of any pension fund is properly taken into account in the divorce financial settlement.

For advice and help on pensions in divorce and financial settlements and for information on the law on pension sharing orders please call me on 0203 959 9123 to discuss how I can help you.