Pensions and Divorce

• balance the pension rights against another asset, such as the matrimonial home (this is known as Pension Offsetting); or
• arrange that when one party's pension eventually comes into payment, a portion of it will be paid to the other party (this is known as Pension Earmarking) or
• split the pension at the time of the divorce to give both parties their own pension pot for the future (this is known as Pension Sharing)

All the couple's assets are taken into account and pension benefits are offset against other assets (e.g. the matrimonial home). The party with the pension rights keeps them for him/herself and the other party is given the benefit of other assets, such as the right to live in the matrimonial home.

It can be difficult to achieve a fair share of a couple's total assets by offsetting a pension pot against other assets. This may be because pension pot is by far the greater in value. Also pension values tend to fluctuate more than, say, property values. If it turns out to be difficult to achieve offsetting, one or other of the alternative bases is then likely to be used.

Pension Earmarking was introduced by the 1995 Pensions Act, for divorce petitions filed on or after 1 July 1996 (or 19 August 1996 in Scotland).

The pension scheme, on instruction from the Court, pays a specified amount of the member's pension and/or lump sum (in England, Wales and Northern Ireland) or a specified amount of the member's lump sum only (in Scotland) to the ex-spouse. The amount is specified at the time of the divorce but as with all periodical payment orders, either party can apply to the Court to have the amount varied. The payment is made when the spouse with the pension pot retires, say, or when they die.

Earmarking has not proved entirely satisfactory in practice, as it does not achieve a 'clean break' and does not enable the ex-spouse to receive retirement income until the spouse with the pension pot retires. An additional drawback is that if the Divorce Order is for the regular payment of a pension, those payments will stop when the spouse with the pension pot dies or if the party receiving the earmarked pension remarries (for reference, the right to a lump sum under an Earmarking Divorce Order does not stop on remarriage).

The Welfare Reform & Pensions Act 1999 gave powers to the Court to split pension rights between husband and wife on divorce. This legislation is not retrospective and only applies to proceedings for divorce or annulment filed on or after 1 December 2000.

The basic concept is to separate the ex-spouse's benefit entitlement (as specified in the Court Order) from the pension scheme member's, so that there is a 'clean break'. A Pension Sharing Order is issued that creates a Pension Credit Member (the ex-spouse) and a Pension Debit Member (the member).

The Pension Credit is based on the member's Cash Equivalent Transfer Value (CETV). The Credit will be a percentage of the CETV, not a fixed sum of money. The CETV is calculated as of the day before the Pension Sharing Order takes effect, so it can be higher or lower than the value disclosed at the start of the divorce proceedings. The Pension Sharing Order takes effect from 'the date on which the Decree Absolute of Divorce or nullity is pronounced or if later, either (a) 21 days from the date of this Order, unless an appeal has been lodged in time, in which case (b) the effective date of the Order determining that appeal'

This is clearly a complex area, Simple Solutions have worked with clients who have split pensions as part of a divorce settlement and we understand the issues that need to be considered.