A pension is an asset – to be disclosed
Questions I am commonly asked are “Do I have to disclose my pension to my spouse?” and “Will my spouse get half my pension if we divorce?”
The answers are “Yes” and “Not necessarily” respectively.
The value of all pensions must be disclosed if you are applying for a Financial Order within divorce or if you want to enter into a Separation Agreement. A pension has a capital value and is therefore an asset as well as a future source of income. Indeed, often a pension fund, although not a realisable asset like a savings account, can be the most valuable of all the assets.
Some clients find it difficult to comprehend that a spouse who has made no contributions towards the other’s pension might be able to make a claim against it. Only this week I had to explain to a client that their pension fund, which is greater in value than all the other matrimonial assets put together, will need to be disclosed and, in this case, undoubtedly shared. Theirs is a long marriage and the client’s financial contributions towards the marriage (and the pension) would be given no greater weight by the court than their spouse’s non-financial contributions towards the family.
Another client recently, who has a smaller pension than their spouse, was adamant that they did not want disclosure of their spouse’s pension as they did not want to make a claim against it. I had to explain that it is important to get full disclosure of all assets including pensions and that is is possible to take pensions into account without physically altering either spouse’s pension provision for the future – i.e. by giving the spouse with the lesser pension provision a greater share of the non-pension assets (known as off-setting).
How does a Pension Sharing Order work?
A Pension Sharing Order is only available if you are getting divorced and not as part of a Separation Agreement. Pension Sharing is where, under a court order, a pension is divided on divorce so that a fund is created in the recipient’s own name. Depending upon the rules of the particular pension scheme concerned, the recipient’s fund either remains with the same pension provider and they become a member in their own right (an ‘internal transfer’) or it is transferred into a different scheme (an ‘external transfer’) so that part of the original pension is taken away and given to the recipient. In either case, you will each have an entirely separate pension fund which is subject only to the individual pension scheme rules and not to any involvement from your former spouse.
Pension Sharing should always be actively considered in all financial claims on divorce except for the shortest of marriages, the smallest of pension funds or where the parties pension rights are very similar in value and future entitlement.
What is pension offsetting?
This is where a spouse is compensated for the loss of pension rights by getting a larger proportion of the other assets. For example one of you might keep a higher proportion of cash assets – equity in property or savings – with the other retaining their pension in its entirety or only losing a small proportion by way of a Pension Sharing Order.
What is a pension attachment order?
This is where the pension remains in the pension member’s name and with their pension scheme with part of it being ‘ring fenced’ for their former spouse on the retirement of the pension member. In this way, when the pension becomes payable, the recipient may, for example, receive some or all of the tax free lump sum payment and monthly pension income and the pension member will take the remainder.
Attachment has one major disadvantage in that it is dependent on the member’s pension rights. Therefore, if the pension member decides to delay receiving their pension until they are 69 years old, for example, then the recipient will also not receive any payments until then. In addition, the recipient will lose all claims in relation to it if the scheme member dies before them.
Consequently, in most matrimonial financial cases the pensions are dealt with by way of a Pension Sharing Order or by way of offsetting.
What is a Cash Equivalent Transfer Value (CETV)?
The Cash Equivalent Transfer Value (CETV), sometimes referred to as a Cash Equivalent Value (CEV), is the figure which is used to value a pension on divorce. The CETV has been available since at least the mid 1980s and is the amount of an individual’s pension fund which would be transferred into another fund if so required. It provides the value of the pension rights accrued as at the date of valuation.
The CETV has certain advantages in that it is usually free (an individual is entitled to one free CETV from their pension provider in any 12 month period) and it is relatively easily available.
Do I need a Pension Actuarial Report?
The CETV of a pension may not accurately reflect the value of the fund because, for example, it may be under-funded. Conversely, a final salary pension can have value in excess of the CETV because it allows for salary increases over time. It follows that Public sector and Armed Forces pensions can have CETVs which are considerably lower than the equivalent fund that would be needed in the private sector to purchase a pension of equal worth.
It is therefore sometimes necessary to obtain specialist advice from an independent actuary about the true value of a pension fund. Such a report is usually obtained on the joint instructions (and at the shared expense) of both of you. It is normal for the actuary to comment upon the appropriate level of pension sharing order required to, for example achieve equality of incomes on retirement in the case of a long marriage, and to provide their opinion on the effect of a pension sharing order as well as the capital figure which would be required to offset a pension claim.
An actuarial report can be of great assistance in deciding on the fairest way to deal with pension assets.
What is the Pension Sharing Order process?
The procedure for getting a Pension Sharing Order is set out in Chapter 8 of the Family Procedure Rules at rules 9.29 to 9.37.
Application by consent (where both spouses agree)
First of all, the divorce petition must indicate that you will be applying for a Pension Sharing Order.
Then, if you and your spouse agree what Pension Sharing Order you want and are applying for a Consent Order, the pension scheme member needs to write to the pension provider requesting the information set out in Section C of Pension Inquiry Form (Form P).
Once you have this information you need to:
1. Provide it to the other spouse;
2. Each complete a Statement of Information for a Consent Order (Form D81);
3. Each sign an application for a Consent Order – the body of the order must state that there is provision for a Pension Sharing Order in an attached Pension Sharing Annex (Form P1);
4. Submit the Consent application, draft Order, Pension Sharing Annex to the court with a fee of £50.
Financial Remedy application
Unless you are applying for a Consent Order, an application for a Pension Sharing Order is made on Form A, a copy of which should be sent to the administrators of the pension scheme in respect of which the application is being made.
You then each need to request from your respective pension providers the information referred to in Regulation 2(2) of the Pensions on Divorce etc (Provision of Information) Regs 2000 and provide this to your spouse (usually with Form E).
Sometimes additional information may be requested from the pension provider on Form P.
Wording of Pension Sharing Order and Annex
A Pension Sharing Order must contain a statement in the body of the order that there is provision for a Pension Sharing Order in an attached Pension Sharing Annex.
The Pension Sharing Annex is called Form P1 and sets out the details of the pension share – the percentage to be transferred, who is to pay the implementation costs, the destination of the pension credit etc.
How long will it take to implement my Pension Sharing Order?
Once a Pension Sharing Order has been made, the pension provider needs to be sent a copy of the Order, the Annex and the Decree Absolute.
The pension provider must then implement the Pension Sharing Order within four months from the date of the “Transfer Day”, provided that the Order, Annex and Decree Absolute have been received.
The Transfer Day is the actual date the Pension Sharing Order takes effect, which is 28 days after the date of the Pension Sharing Order (or the date of the Decree Absolute if this is later).
In other words, the Pension Sharing Order may take up to five months to be implemented.
Pension Sharing pitfalls
It is crucial to get legal advice from a specialist family solicitor before obtaining a Pension Sharing Order as there are a number of pitfalls which can trip up all but the most experienced lawyer.
Points to consider include:
1. The “income gap” which can occur where a pension is already or will soon be in payment to the scheme member, but the other party is not able to draw a pension for many years and needs income now;
2. The impact of the death of either party after a Pension Sharing Order has been made, which can be minimised by careful drafting of the Order and appropriately timing the application for Decree Absolute;
3. The enforceablility of a Pension Sharing Order overseas;
4. Taking steps to protect against “moving target syndrome – i.e. the potential for changes in the value of a pension between the transfer day and the date the pension value is recalculated within the implementation period, called the valuation day.
For more information please contact Sarah Jackson, specialist Family solicitor and member of the Law Society’s Family Law and Advanced Family Law accreditation schemes, on 01225 462871.
Image by Jakub Hlavaty under a Creative Commons licence