Oliff Associates - Professional Financial Planning

Pension Sharing in Divorce

The introduction of pension sharing gave much greater choice in the utilisation of pension benefits in divorce settlements, resulting in a much greater need for advice to the divorcing parties on the available options and to scheme trustees on how the new legislation will affect their schemes. Your adviser will be able to explain the complexities and recommend the most appropriate course of action for you and scheme trustees. The following is a list of some of the areas where expert advice will be required.

Which options?

Divorcing clients will need advice on which of the options is most appropriate to their circumstances.

Offsetting, Earmarking or Sharing?

Since sharing was introduced the courts will, in theory, have 3 options to consider when dealing with pension rights on divorce. Although each case will need to be considered on its own merits the following may help to set out some of the advantages and disadvantages of each of the approaches.

(a) Offsetting

Where offsetting is used the value of the member´s pension rights are taken into account in any divorce settlement although the actual rights are retained by the member. In effect the value of the pension fund is set off against other assets of the member (eg. the ex-spouse may receive other non-pension assets - eg. matrimonial house) as part of the divorce settlement

Offsetting may be attractive where:

the divorcing couple are fairly young, both at work, there are no children involved and there are sufficient non-pension assets to allow offset
the couple´s assets are such that even after the split they are still large enough to provide each party with sufficient resources to carry on with their lives
the ex-spouse already has a decent retirement income, which would normally make pension sharing less appropriate.

Offsetting may be less attractive where:
the member´s pension value is high compared to other assets which may make offsetting extremely difficult
a replacement pension will be needed for the ex-spouse, which may be difficult to provide if the time to the ex-spouse´s retirement date and money are short, or if the ex-spouse is not working
life assurance benefits under the member´s pension scheme are lost by the ex-spouse

(b) Earmarking

Earmarking enables an English or Welsh court to direct the trustees of a pension scheme to make payments to an ex-spouse from the date the member draws benefits under deferred maintenance orders.

Earmarking suffers from a number of problems including:

the dependent ex-spouse can receive no benefit until the member decides, or is forced, to retire
the dependent ex-spouse will lose all benefits if they are predeceased by the member
the pension benefits will cease if the ex-spouse remarries
the member may effectively be able to reduce the benefits of the deferred maintenance payment. For example, the member could opt out of their employer´s scheme and make alternative provision by means of a separate savings vehicle (eg. ISA) which would not benefit the ex-spouse.
the basis of benefits under the member´s scheme may change between the time that the court order is made and when the member retires
the ex-spouse will need to keep the scheme trustees advised of any changes in his/her circumstances (eg. change of address, remarriage etc).

Earmarking can, however, be attractive in a number of areas including:

where the divorcing couple are in their 50´s and other forms of maintenance provision are inappropriate. This will particularly apply where the ex-spouse is unemployable (either because of their age or lack of experience)
where the pension scheme does not have any readily realisable assets (e.g. where a small self administered scheme is almost wholly invested in the company´s own property, this will make sharing very difficult)
where the lump sum death in service benefit is earmarked for the ex-spouse
where the member is already in receipt of an annuity. Although it will be possible to "share" an annuity in future, earmarking may be seen as more appropriate in many cases.
for example, where an annuity is shared it will be achieved by creating a new pension or deferred pension with the existing provider. As any new annuity will need to take into account the state of health and relative ages of the annuitants at the time, it is quite possible that the pension available to the ex-spouse will be lower than expected. For instance, a wife divorcing a husband of the same age could not expect to receive half of his pension because of her greater life expectancy.
where an annuity is earmarked the need to set up a new annuity for the ex-spouse will be avoided as he/she will be receiving a maintenance payment of part of the member´s annuity. However, there remains the risk that the member will pre-decease the ex-spouse which will result in the earmarked benefits ceasing.

(c) Sharing

Which sharing option?

If sharing is determined as the most appropriate option, and the ex-spouse is offered the choice of retaining benefits under the member´s scheme, or transferring the "pension credit" to another scheme they will need advice on the best option. If a transfer is seen as the most appropriate, advice will be needed on the optimum receiving scheme (eg. personal pension, Section 32 etc) and on the best provider for such a scheme.

Pension sharing provides an extension to the "clean break" principle.

It seems most likely to be used in the following situations:

where the ex-spouse is relatively close to retirement. The ex-spouse may find it very difficult to build up a comparable pension fund in the short remaining period to retirement
where the divorcing couple are older. Here the ex-spouse will be able to take benefits from age 50 in respect of the "pension credit" rather than have to wait until the member retires (as would apply in respect of earmarking)
where the ex-spouse may be thinking of remarrying. Unlike earmarking, any pension sharing arrangements would be unaffected by this.

Pension sharing may be less attractive where:

the retention of the family home is a key priority for the ex-spouse. The sharing of the member´s pension rights may necessitate other assets to be shared (eg. the family home). This could result in the sale of the matrimonial home and the need to trade down to a smaller property
the ex-spouse already has adequate pension provision.

Things you may need to know: