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Pension changes and divorce

It has been a while since we have written about pensions. To many people they are simply a pot into which money is put on a regular basis in the hope and expectation (these days looking increasingly fanciful) that they will provide for you in retirement. However, pensions are one of the assets which can be transferred or shared on divorce or dissolution. In many cases they can be some of the most valuable assets belonging to the parties. So, a brief reminder of what can happen to pensions on divorce is probably timely.

There are three main ways in which pensions can be dealt with on divorce. The first is known as “offsetting” and is where one spouse keeps all or part of the pension pot in return for the other spouse having a larger share of other assets, often the house. The second option is to “attach” for the other spouse part of the cash lump sum and/or monthly payments the pension holder will receive on retirement. Pension attachment is done only rarely, and indeed there can be problems with both of these options, particularly in longer marriages, or where the pension assets are complex. The third, most commonly used option is “pension sharing”. This works by splitting a pension between the spouses in whichever proportions are agreed or ordered. A specified percentage is carved out from one pension, and the recipient can then either form a new pension with it or add it to their existing pension fund, depending on the terms of the scheme.

In a pension sharing order, calculating the appropriate percentage split can be tricky. This is particularly true where some of the fund may have been built up prior to the marriage, or come from non-marital sources, or where the couple are older and the pension is already in payment. Where pensions are in payment, they may still have a value and be shared as a capital asset, or they can be treated as an income stream on which a maintenance order in favour of the other spouse could be imposed.

Of course, the usual family financial principles apply to pensions as they do to other assets: a solution agreed or imposed between those divorcing needs to take into account fairness, a check against equality, meeting needs, sharing, and in some limited cases compensation.

A recent case considered how best to deal with the pension assets of a couple divorcing now after 43 years of marriage, in their 70s, and has thrown up some new guidance. The couple were married in 1969 and had four children, all adult at the time of the hearing.

The couple were well-off pensioners: the husband had pension investments worth £1,865,430, and the wife had pension investments of £753,000. The wife wanted a pension sharing order to provide her and the husband with equal pension income for the rest of their lives. Due to the way pension fund values are calculated, including the longer life expectancy of women, equality of income for the wife in this case (as she was younger at age 70 than her 73-year-old husband) would have meant she would have had a greater than 50% share of the combined pension fund values. This kind of solution has found some favour with judges in recent years.

Here though, the judge said that such an approach was “unfair and anachronistic in a case where the assets exceed the parties’ needs.” He went on to point out that the recent changes to pension regulations, removing the obligation to purchase an annuity with a pension fund at retirement, has meant that pension investments can be treated almost as bank accounts for people aged over 55 (subject to tax charges). As the flexibility of these assets has changed as a result of the government’s changes to the regulations, the courts’ approach to them will also need to change. He said that giving a wife more than her husband on account of her age or gender would be unacceptable discrimination, unless the case was governed solely by the needs of the parties. Here, as there was more than enough to go round, it was not.

The judge argued that if one spouse, or civil partner, received more of a pension fund simply on the basis that they were likely to live longer, now the nature of pension assets has changed that approach would logically have to extend to all capital assets being divided on divorce. This could not be right. When cases are not governed solely by needs, it would be incorrect to distribute a pension fund on the basis of equality of income for the future, which would necessitate unequal division.

The judge then went on to split the pension funds equally by reference to their values. This had been a long marriage where both parties agreed that the sharing principle applied – i.e. there was enough to meet the future needs of both of them, and have money left over to share. In other cases where marriages have been of shorter duration, or where there is not enough to meet needs, pension funds may be split unequally. However the important point to come out of this case is that dividing pensions by reference to future income streams may no longer be appropriate due to the change in the nature of pension funds on retirement.

Pensions are complex things, and the law relating to them on divorce is no less complex. If you have any questions arising from the above, or about pensions or finance on divorce generally do get in touch with us to make an appointment on 01223 443333.

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