Are you facing the end of your marriage or civil partnership? If so it’s extremely important not to overlook pensions when considering how to distribute your assets.

It is true that pensions can be a complex asset to consider on divorce. This may be why a study has shown that 7 in 10 divorcing couples do not share pensions. Even though the courts allow pension sharing.

Some divorcing couples choose to ignore pensions completely

Some divorcing couples choose to ignore pensions completely. They either consider the pension to be one parties sole asset (non-matrimonial). Or they are trying to stay on amicable terms with their spouse, by not making a claim.

Some people are not even aware they can make a claim. Some divorcing spouses may even use the threat of making a claim, if their spouse does not agree with other financial aspects of the divorce. When dealing with matrimonial finances on divorce, a Judge has the power to share out all your income, property, pensions, and savings in a way that meets the needs of both you and your spouse.

How the Court achieve this is dependent on numerous circumstances such as your different needs. This includes health, difference in age and how long you have been married. A parties future income needs is the income.

Pension sharing and your retirement income

Most of the time, your state pension, if applicable, will not cover all your monthly outgoings. Therefore a lot of people must also rely on private pensions they need when they stop working. That’s why many family practitioners advise that a pension sharing order is in your best interest over offsetting.

Explaining offsetting…

Offsetting means you trade a right to receive all or part of your spouse’s pension benefit now or in the future for an asset you can benefit from right now, for example the former matrimonial home. Offsetting, although can seem desirable in the moment, may be something you regret in the future.

For example, if one party offsets their claim to their spouse’s significantly large pension so they can remain in the former matrimonial home, what happens when they come to retire?

With no pension provision to provide them with an income they may no longer be able to afford the outgoings on the property forcing them to sell. Moreover, what if house prices have dropped since the transfer of the property. The equity in the property will have also dropped.

Understanding your pension options and their true value

Therefore, it may be that the house then needs to be sold in any event, so you are able to afford to live off the equity. It is therefore extremely important that you explore offsetting with a family practitioner. There are also part offsetting and part pension sharing options to consider.

In situations where one or both parties have significantly large pensions a Pension Actuary Report may need to be obtained. When negotiating regarding pensions a ‘cash equivalent transfer value’ of the pension will be used. However, these figures often do not reflect the true value of pension rights.

The cash equivalent is the basis for pension sharing but can provide an inaccurate value of the benefits, especially because any Pension Sharing Order must be expressed as a percentage of the cash equivalent calculated by the pension provider.

Pensions can be one of the most significant assets that you and your spouse may have. It is therefore extremely important both you and your spouse know what pensions you both have now and are likely to have in the future.

Equalising your cash equivalent values may not always the best case.

It is also important that your positions are equalised as much as possible so that your future income needs are met. This may simply be by equalising your cash equivalent values. However, this is not always the best case.

It may be that equalising your income upon retirement would be the best way forward, however this is a calculation which an expert will need to undertake in a Pension Actuary Report. In the absence of a Pension Actuary Report, it is difficult to know what income will be yielded by a pension share.

Pension Actuary Reports’ can be quite costly which can make parties reluctant to spend money to get expert advice.

However, the cost of such advice can become insignificant against the cost of getting it wrong. In addition, the instruction of a single joint expert to prepare a report can save a lot of time and money in debate and argument in relation to pensions.

For more information or if we can help in any way please get in touch with our specialist Family Team or email familyenquiries@fsmsolicitors.co.uk or call 01225 755621