Pensions and Divorce

Offsetting involves getting the value (usually the cash equivalent or transfer value) of the pension benefits as at the date of the divorce. This value is added to the total value of other matrimonial assets to be divided between the parties.

Pensions are valued differently depending on where the divorce is taking place, eg in Scotland a pension is viewed in the same way as any other investment. Basically £1 in a pension is valued in the same way as £1 in an ISA. There is no factoring in of the eventual tax treatment when benefits are taken (ie usually only 25% of a pension is tax-free, whereas an ISA is entirely tax-free). Also, no account is taken of when the pension can be accessed, so for divorces where one (or both) parties is below minimum pension age, the £1 for £1 valuation may create issues.

In England, Wales and Northern Ireland, pensions are not valued as any other investment, so the solicitors dealing with the divorce may need to engage the services of an actuary to determine the value of the pension rights in today’s terms for the divorce.

Once the value has been decided, the ex-spouse gets a share of another asset instead of a share of the pension. For example, the ex-spouse may retain the family home, or at least a larger share of its value, to compensate for the value of the pension assets.

An attachment order (also commonly referred to as earmarking) is effectively deferred maintenance. This option does not allow a clean break between the divorcing parties, and is less common since the introduction of pension sharing, which is allowed for divorce proceedings started on or after 1 December 2000.

The court uses a cash equivalent basis for the pension benefits. All pension benefits may be taken into account, except any already earmarked from an earlier divorce.

In England, Wales and Northern Ireland, the benefits that can be earmarked are:

1. A specified percentage of the pension benefits when the member starts to draw their benefits
2. A share of the lump sum available when benefits are accessed
3. A specified percentage of any lump sum death benefit in the event of death of the member before retirement

In Scotland, only 2 and/or 3 can be earmarked.

There are several disadvantages with earmarking, mainly that the ex-spouse has no control over when benefits are taken or what investments the fund is in, and regular payments usually stop if the receiving ex-spouse remarries or if the pension-holding member dies.

Pension sharing separates the ex-spouse’s pension entitlement from the member’s pension, giving a clean break. The court decides how much of the pension rights should be allocated to the ex-spouse and the member’s benefits are reduced by the corresponding amount.

Existing pension annuity income, scheme pensions in payment and most drawdown pots can be shared. Any dependant’s, nominee’s or successor’s drawdown pots cannot be physically shared under an order, although the value of the pot may be taken into account when reaching the divorce settlement.