What happens to pensions in divorce?

Financial settlements

When you are looking at the financial outcome in a divorce or dissolution of a civil partnership, the first step is to assess what assets there are;

• What capital is there?
• What income is there?
• What pension provision is there?

How much are these things worth, what is their value? They all add up and in certain situations, pensions can play a big part in divorce.

The more complicated the financial portfolio, the more complicated the matter can be. All other things being equal, reasonable length marriage, no weighty contributions on either side or conduct issues, the starting point for division of assets is likely to be equality.

Valuing pensions

If you have fairly young parties or a long time until retirement, there might be reasons why you concentrate on capital value. In more cases we look to divide pension income, often so that each person gets about the same income in retirement from the pots as they are at the time we are looking at them.

Pension administrators can give you a valuation of your pension for the purposes of divorce, they will send you the cash equivalent of the value. The complicated factor here is that all pension administrators use different actuarial methods of calculating those values so they could come to the different values of the same pot. There different types of pensions, defined contribution pensions, defined benefit pension.

Using a Pensions on Divorce Expert (PODE)

If total pension provision exceeds £100,000 then very often we will ask an actuary or PODE to define what these pensions are worth. This will usually be single joint instruction from both solicitors so a neutral instruction to an expert. The idea is to establish how best to split the pot, to achieve a single outcome, or range of outcomes being considered.

How shadow experts help

Using a trusted shadow expert is often a very wise move to ensure that the instructions are clear and you receive answers that you want to any questions. A shadow actuary to help draft the instructions is shrewd.

The Pensions Advisory Group has given clear guidance as there was a real need for this. You don’t want to ask the actuary lots of unnecessary questions, you want to give them defined instructions, drill down right from the start about what you want.

Are there reasons why you might want the pension to be paid earlier? Do you want to trade? You need to have your strategy clearly in mind when you do that letter of instruction because what the actuary says will be highly persuasive.

Conclusion

Pensions are one of the most complex issues in divorce. If the pensions are big, you might want to take financial advice as well as legal advice and decide how you want to split the pensions in a divorce. Clear instructions with an expert is crucial for financial settlements in divorce as well. We can talk you through the process and advise on all options, contact us if you need specialist help.

This article is part of Private Client Issues – May 2021