A recent paper, titled 'A Witches Brew', has been published which explores the minefield that is dealing with pensions on divorce.
The article explores how there is no clear judicial guidance on how pensions are to be dealt with.
This has only become more complicated with The Taxation of Pensions Act 2014, which permits pension holders to draw down pension capital at 55 in pension Defined Contribution schemes (DC) (aka money purchase schemes) and allows Defined Benefit schemes holders (DB) (aka final salary) to transfer to a DC scheme on receiving advice. This means couples negotiating financial settlements have to be conscious of the ability of their spouse to access the pension pot.
For many married couples, pensions are often the most significant asset in their marriage and it is important that the division of this asset is addressed on divorce.
The paper makes interesting reading, and we have summarised the most important points below to allow the reader to be aware of those issues to which they should be alert.
I would certainly recommend that legal advice is taken before any agreement is concluded as decisions taken at an emotionally charged time will have implications for the rest of an individual's life.
Key Points on Divorce and Pensions from 'A Witches' Brew'
• The division of matrimonial assets on divorce is guided by the principal of equality, but the court can diverge from equality to meet a spouse and child's needs. The court is also guided by other factors such as age, length of marriage, earning capacity, income and resources. When considering how pensions are divided, the court will have to consider the parties' needs and the effect of the parties on division.
• Pensions come in different shapes and sizes, but overall there are two main types:
1. A defined contribution scheme where an individual is purchasing an annuity that then funds a lump sum and income on retirement.
2. A defined benefit usually provides an income based on final salary or average income during the life of work.
• The Court can treat a pension as a capital asset to be split between the parties, or as a potential income asset where a formula is needed to calculate how future incomes are equalised. There is no set rule as to how the court will treat an individual case, but as couples near retirement age, the argument swings to treatment as an income asset rather than capital asset.
• Courts use a formula called the Cash Equivalent Value to assess the value of a pension. This figure is that which would be transferred if an individual sought to move to another pension provider. That figure may not tell the whole picture and the situation can be complicated by other factors such as future guaranteed annuities, whether a 'transfer in' on a pension sharing order is allowed that is the same as the fund provider, or a new external provider is required. If these factors are not considered the eventual share may not provide an equal position.
• An order sharing the pension of one spouse with the other cannot come into effect until either a Decree absolute or 28 days after the order, whichever is the later. This has consequences if a spouse dies before the order is effective, or a spouse draws down an annuity ahead of the order being effected. Notice has to be given to the pension provider at the start of the case, and a court order may need to be drafted in such a way as to prevent reduction in the asset.
• The courts in complicated cases often rely on experts to advise on pension division. These experts (called Actuaries) are expensive, and the quality of report depends on the quality of expert, questions put to them, and information provided. The courts usually will only make an order for an expert on receipt of a properly presented request. The reports ultimately can be complicated and sometimes ambiguous.
• There are other ways of dealing with a pension asset, such as giving an individual more capital out of other assets such as any property owned. This is not always fair or providing equality of division.
• The changes to state pension retirement ages should also be factored into any consideration of future income resources.
• If an individual has contributed to a pension pre-marriage or post-separation, it can be argued that the whole asset is part of matrimonial assets and should be divided.
Obviously this is a complicated area and the article provides plenty of examples of situations where pensions are divided and the consequences are considered.
If you feel that you need advice about the distribution of assets on separation or divorce please call our family team on 01616653502 or contact us online.
Here is the link to the original article.