What is pension sharing and how does it work
After separating from your spouse, sharing pensions can be very challenging, not only because often spouses do not want to share their pensions or do not feel that they should have to but also because pensions can be very complex and difficult to navigate. This article will consider the various options available to spouses when it comes to separating pensions and key aspects we consider when addressing their division.
WHAT POWER DOES THE COURT HAVE TO SHARE A PENSION?
To make an application to share a pension provision, you will need to submit a Form A to the court in accordance with the Family Procedure Rules 2010. Typically claims against pensions are made alongside an application for other types of financial order i.e. lump sum orders, property orders and/or maintenance. The courts have three key powers in respect of pensions:
1. A pension sharing order.
This involves transferring a percentage share of an existing pension fund held by one spouse, to another pension fund held in the name of the other spouse. It may be that the other pension fund is an already established fund held by the spouse or a new fund set up purposely to accept the pension share.
2. Pension attachment order.
The court has the power to order that a person receiving a pension must pay a proportion of that pension to their former spouse. This is a less common arrangement because it does not provide for a clean break between the parties.
3. Pension Offsetting
This means that the court looks at the transfer value otherwise known as the ‘cash equivalent’ value of the pensions and decides to give the person without the pension fund or with a lesser pension fund, a lump sum payment to balance out the assets e.g. one spouse retains more of the family home or savings, rather than taking the share from a pension.
This is usually only possible where there is spare money/assets available after rehousing both spouses.
THE GUIDANCE ON DIVIDING PENSIONS
In July 2019, the Pension Advisory Group (PAG) published guidance on the treatment of pensions on divorce. That guidance was updated in December 2023. The report considered a number of important issues, for example:
- The limitations in the use of Cash Equivalent Values (CEVs)
- Whether pensions should be divided based on capital value or to achieve equality of income in retirement
- Whether it is possible to ring-fence pensions acquired pre marriage or post separation
When considering each of the above issues in turn, it is advised that CEVs represent the figure that a pension provider might offer in return for an individual relinquishing all future
entitlements to a pension scheme. The methodology behind calculating CEVs can vary considerably based on the particular pension scheme. Instead, an Actuary (a Pensions on Divorce Expert) can be used to identify potential issues that may arise and provide guidance on how to achieve a fair valuation and division.
When looking at whether pensions should be divided to achieve equality of capital or equality of income, the PAG report emphasised the need for the court to seek a fair outcome. Thereafter, in W v H [2020] EWFC B10, the court discussed whether pensions should be divided based on capital value or income. The preference found was for trying to ensure that spouses have equal pension income upon retirement in cases focusing on the parties’ needs, especially in cases with sizable pensions and where the parties are nearing retirement. In contrast, an equal division of pension capital might be more appropriate for smaller Cash Equivalent Values in younger parties. In order to calculate the pension share required to obtain equality of income, it will often require expert input from an Actuary (a Pensions on Divorce Expert).
When considering if a pension should be ring-fenced, this looks at pensions that are accrued outside of the period of marriage and whether they should be excluded from the matrimonial pot (ringfenced). However, in cases focusing on meeting the parties’ needs, the practice of ring-fencing pensions accrued outside the marriage might not be suitable. The PAG report emphasised that in needs-based cases the timing and source of the pension saving is not necessarily relevant. The focus of the court is to ensure that both the parties needs are appropriately met.
Pensions can be complex and so it is crucial to approach them carefully when addressing the financial aspects of separation. Each case is unique and requires personalised advice tailored to its specific circumstances. If you would like to receive further advice about the issues considered in this article please do not hesitate to contact one of our expert family solicitors Michele Ashton or Lisa Bell.
