Dividing finances can be one of the most challenging aspects of a marital breakdown. Pensions often form a significant—and sometimes the most valuable—part of the matrimonial assets, yet divorcing couples frequently overlook them because they believe pension sharing will leave them financially tied to their former spouse. This is not the case, so the importance of understanding and considering pension sharing should not be underestimated.
How are Pensions divided in a divorce?
The cash equivalent value of both spouse’s pension provision are added to the matrimonial pot. Once this has been disclosed, discussions of how pensions will be divided between you and your spouse can take place. When you are negotiating a financial settlement there are various ways in which pensions can be dealt with: Pension Sharing Order, Pension Attachment Orders, and Pension Offsetting.
What is a Pension Sharing Order?
Where it is agreed, or ordered, that pensions should be divided, it is usually by way of Pension Sharing Order which provides the receiving party with a percentage of the other party’s pension or pensions to ensure a fair outcome and to ensure both parties’ needs are met.
A Pension Sharing Order once implemented, completely separates your pension assets. You will have your own pension and will not be tied to your ex-spouse in this regard.
How do Pension Attachment Orders work?
A Pension Attachment Order (this order may be made in a smaller minority of cases) is when the pension company (trustees) are directed to redirect a percentage of one spouse’s pension benefits to the other spouse when they are received, for example, monthly and ends upon the death of the former spouse.
This is an on-going tie to your spouse, as the pension is never separated. They are much less common because they provide the recipient with very little certainty.
What is Pension Offsetting?
Pension offsetting offers an alternative way to address pension assets on divorce.
Pension offsetting is not a pension sharing order. Instead, one party keeps all or most of their pension benefits and gives up other matrimonial assets, such as an interest in the family home, to provide a balanced settlement for their former spouse.
How is a Pension valued?
As there are different types of pensions, it may be necessary to obtain an actuarial report so the pensions can be valued on a consistent basis that will result in a fair outcome for both of you in deciding how they are going to be dealt with.
However, whilst the Cash Equivalent Value is used, the types of pensions (occupational vs defined benefit) determines the actual value and therefore great care must be taken to ensure the asset is not undervalued.
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