Pensions During Divorce Proceedings

In proceedings for divorce, nullity, judicial separation or dissolution of a civil partnership, the Court has the power to redistribute the benefits derived from pension resources between the parties.

Pension resources in divorce proceedings

Sections 25(2)(h) and 25B(1)(b) of the Matrimonial Causes Act 1973 (MCA 1973) require the Court to have regard to the benefits under a pension arrangement that, by reason of dissolution of annulment of the marriage, a party to the marriage will lose the chance of acquiring.

Pension rights will often form the second largest asset upon marriage or civil partnership breakdown, after the family home, particularly if one of the parties has, for example, served as a police officer or a member of the armed forces. It is important to understand the full range of options available when dealing with pensions, and the implications involved, in order to provide a bespoke outcome for clients. It is therefore essential to understand the nature and value of pension rights, the ways in which the rights can be apportioned and the ensuing implications for the parties.

Where pension fund(s) are a material part of the assets, consideration should be given to:

• The nature of the pension fund(s);
• The uses to which the pension fund(s) can be put;
• The manner in which the Court’s powers can be used to fit the future needs of the parties, and
• The appropriate use of experts (independent financial advisers and/or pensions experts) to gather relevant information, interpret that information and consider the effect of the exercise of the Court’s powers on the parties.

Often parties may wish to equalise their retirement provision by sharing the available pension resources. A party may intend to draw a tax free lump sum at retirement, which represents capital, and usually, the rest of the pension fund will be accessed as deferred income. If a pension is already in payment it can be treated as current income.

Merely splitting the pension 50:50 will not necessarily produce equal pension income on retirement. This can be for a number of reasons, not least the respective ages and life expectancies of the parties, and the commercial reality of what the pension credit will buy the pension recipient in terms of income on retirement. Another approach can be to provide the pension recipient with a percentage split that will equalise pension benefits on retirement.

In many divorce cases an equal sharing of pension rights will not produce a fair result because of the parties’ needs, ages, length of the marriage or because the pension rights are non-matrimonial assets.

Pensions sharing – so what options are available to divorcing parties?

1. Offsetting

Pension offsetting is the process whereby the value of the pension resources is set against the value of other assets held between the parties. Offsetting does not involve the Court making any pension orders. The pension rights remain with the pension member. It works by adjusting the distribution of non-pension assets to take into account that one party will have less valuable pension provision. It can often be used in cases when one party wishes to retain the family home at the expense of future pension provision. It is also an option where the pension rights cannot be shared, for example an overseas pension.

Historically, offsetting was a popular approach taken by the Courts. It is now less common as both pension attachment and pension sharing orders are available. It is still used in cases where:

• The parties are younger, the marriage/civil partnership is short and the pension funds are comparatively small;
• Pension sharing is not available, e.g. there is a foreign pension; and
• One party wishes to remain in the family home, forgoing pension rights in order to do so.

2. Pension sharing

Pension sharing is the method by which an existing (shareable) pension arrangement is split and divided between the parties following divorce, nullity or dissolution proceedings.

A pension sharing order transfers a part (or the whole) of a pension from one party to the other, giving the recipient a separate pension fund that can be invested in the same scheme or in another external scheme (subject to the relevant scheme rules).

3. Pension attachment orders

A pension attachment order requires the person responsible for a pension arrangement to pay a percentage of the pension income, and/or pension commutable lump sum, and/or death benefits available to one party when a pension becomes payable to the other party. In this way, the recipient attaches to the existing pension arrangement.