Advice Around Pensions on Divorce
A guide to how pension assets are dealt with in financial remedy proceedings and the orders that the court can make.
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Often, pensions are one of the most significant assets of a marriage. However, due to their complexities and the deferred benefit they bring, they are often overlooked and not always factored into the terms of an overall financial settlement. It is, therefore, extremely important that early, expert advice is sought to ensure that they are considered when resolving the financial arrangements in the event of a divorce.
Pensions on Divorce - What is a Pension?
Put simply, a pension is a type of savings plan which produces an income in retirement. Pensions have specific rules and regulations around them, with specific tax rules, which can be complex.
There are two kinds of pension provision in the UK: the state pension and private pensions. The state pension is a payment made by the Government when an individual reaches state pension age. Currently in the UK. this is primarily based on national insurance contributions made by them throughout their working life.
A private pension is a savings plan that an individual or their employer sets up and contributes to throughout their working life. The main types of private pensions are defined contribution schemes and defined benefit schemes. The picture is further complicated by the fact that some schemes outside of the normal state pension are public sector schemes, such as those provided by the NHS, or local authorities.
It is important when considering the terms of an overall financial settlement to understand first and foremost the extent of both parties’ pension assets. Often, due to the passage of time, individuals are not always aware of the value of their total pension assets and therefore early disclosure of the parties’ pension assets is crucial.
Pensions on Divorce – What’s Taken Into Account?
Pensions are often one of the most significant assets of the marriage.
The Matrimonial Causes Act 1973 (MCA) is the leading legislation which governs how the court considers financial provision. It sets out the powers of the court to make financial orders on or after the conclusion of a marriage.
Section 25 (2) of the MCA refers to the ‘financial resources’ which each of the parties to the marriage has. It is well accepted that a pension is a financial resource which the court will have regard to.
It’s important to understand both party’s pensions properly. That means each person must share full details of their pensions, including a recent statement showing how much the pension is worth. This is provided by the pension provider and is essential in sorting out the finances fairly during a divorce.
What types of Orders can the Court make in respect of pensions on divorce?
Pursuant to the MCA, the Court has the ability to make a number of orders in relation to Pensions including Pension Sharing and Pension Attachment Orders. In addition, the Court can also ‘offset’ pension assets against other assets such as property as part of an overall settlement.
Pension Sharing Orders
A Pension Sharing Order is an order of the Court which divides one party’s pension, allowing the other party to receive a portion of their pension in their own right. It separates one pension arrangement and creates two separate funds (or allows extraction of an element of the original pension into a new fund). The share remains a pension, however.
A Pension Attachment Order
A Pension Attachment Order (formerly known as a ‘Earmarking Order’) is an order which enables one party to receive a percentage of benefits paid from the other’s pension. Similar to a form of maintenance payment. The pension remains in the original owner’s name until they withdraw funds from the pension, at which point, part of the pension is redirected to the other party. Now that Pension Sharing Orders can be made this is very rare. Although there may be specific circumstances where it is appropriate. This is something which no one should be agreeing to without understanding the implications, however, and obtaining bespoke advice.
Pension Offsetting
Pension offsetting is the method in which one party retains their full pension assets and the other party receives an equivalent share of the other available assets, for example, property assets. It is another means of achieving a ‘clean break’ by compensating one party with assets of equivalent value to their share of the other’s pension. However, caution must be exercised, and expert advice is mandatory to ensure that such an arrangement is fair to both parties as often the true value of pensions is not obvious without expert advice.
What is a Pension on Divorce Expert?
A Pension on Divorce Expert (PODE) is a specialist, financial professional who can provide additional expert input on pension assets during divorce and they often work with lawyers and the Court to help individuals and the Court understand the true value and implications of a pension arrangement.
This may be required for a number of reasons but often a PODE is involved where the pension arrangement is particularly complex or there are a number of pension assets to be considered.
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Strategic Legal Advice for Pensions in Divorce
At Winston Solicitors, we specialise in helping clients across Leeds, Harrogate, and Yorkshire as well as nationally with divorce cases involving pensions.
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