How pensions are treated in divorce
Pensions in divorce are often a significant issue. After the value of the former matrimonial home the pension provision of one or both spouses may be the largest capital asset of the marriage. Pensions and divorce is a question which has assumed greater and greater importance especially since the Pensions Act 1995 and the Welfare Reform and Pensions Act 1999.
The courts have long had the power to take pensions into account in dividing up the matrimonial assets. Very often the husband might have a substantial pension provision and the wife might have none or a very limited pension provision because, for example, she has given up her job in order to look after the children. Such a wife is very likely to wish to be “compensated” for her lack of pension entitlement.
While the spouses remain married the wife might legitimately expect that when her husband retires she will benefit from his pension and, in the event that anything happens to him, she might expect to receive a surviving spouse’s pension. When they divorce these benefits are lost and the wife might be very concerned that she has no provision in her own right and that she has little chance of being able to rectify that within any working life that may be left to her.
Of course, it may be that both spouses have similar pensions or the wife may have a larger provision than her husband but typically in pensions and divorce the problem arises where the wife has very little provision and that most of the pension assets are in the name of the husband.
Nevertheless, it is important to realise that there is no “automatic” entitlement to pension sharing. People often seem to think that just because they have been married they are entitled to half of everything – including the pension. That is not the case. How pensions are divided in divorce is more subtle than that.
In fact when a marriage breaks down the courts have to decide how to divide the matrimonial assets and they do so according to principles laid down by Parliament and, in particular, section 25 of the Matrimonial Causes Act 1973. So, for instance, they will have regard to the needs of any dependent children of the family above all else. That might result, for example, in the former matrimonial being transferred to the wife because she will need to live there as the home for the children. So there might then be only one other substantial matrimonial asset – the pension provision of the husband. Having ordered the husband to transfer all the equity in the house to the wife because the need for accommodation is obviously very important it might then be regarded as unfair also to make him part with half his pension on the basis of some sort of notion that the other spouse always gets half. In such a divorce pensions might be the only asset left to the husband and so the courts may prefer to let him retain more of that asset in return for the wife getting the house. She might, for instance, be able to sell the house and realise some of the equity at a later date if she sells it when the children have ceased to become dependent and the house is then too large for her needs.
This in fact was the way that pensions were very often treated at first – by way of so called “off setting”. In the proceedings to settle the financial issues arising from the marriage pensions are usually given a cash value by the courts – and the so-called “transfer value” is the figure which is often taken. This is the value the pension fund would have if it was transferred out of one scheme into another on a given date and pension fund trustees are very used to providing this information. Of course, a transfer value is not exactly the same as cash. After all, a sum of money in a bank account with which one can do as one wishes is not the same as the same sum of money as a “transfer value” which is basically a basket of pension rights available perhaps at some date in the future. But a pension has to be given a value in one way or another and it is by taking the transfer value that it is normally done in the first instance.
So, then, say the former matrimonial home has an equity of 100,000 pounds and the husband’s pension fund has a transfer value of 50,000 pounds. Instead of saying that the former matrimonial home should be sold and the proceeds divided equally between husband and wife and that the pension should also be divided equally a court might say that the wife should have the house and the husband should retain the pension. This would provide accommodation for the wife and possibly children while allowing the husband to retain a substantial asset. It was very often a more practical solution than dividing both house and pension.
This method of offsetting a pension against other assets is still a very common way of dealing with divorce pension entitlement and the couple themselves often prefer it for various reasons.
In the example above the figures might dictate the answer. Other cases might be, and often are, more complicated. Individual circumstances vary a great deal. The reason we say that is because in very many cases it is not appropriate for one spouse to receive £X amount of cash in return for the other keeping the same £X amount of pension. There is typically a big difference in value between £X in cash and £X in a pension. Not only is there possibly tax to be deducted from the £X in a pension but receiving £X now is different from not being able to access £X for, say, 10 years. Factors such as these mean that if one spouse receives a lump sum for £X held in a pension by the other the amount payable in cash should be significantly less than £X. Depending on circumstances it might be 25% to 40% less although in practice the percentage is often a matter for negotiation.
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