London Divorce Lawyers On Pension And Divorce
The important thing to remember about pension and divorce:
During a divorce, the Family Matrimonial Home is often considered the largest asset to be divided. But what about a pension scheme?
A pension scheme may well prove to be a person’s most significant asset.But even if not, the law provides that the partner who is financially worse-off (usually the woman) is in fact entitled to a claim in their ex-spouse’s pension rights.
This fact alone makes it worthy of far more careful consideration than many give to it.
The obvious first step is to receive a pension valuation from your pension provider in order to see just how much money it is worth. This amount is crucial as it may influence which method of dividing up your pension you choose, which as considered below, can take a variety of forms.
Pension Sharing - PERCENTAGE
The most popular method of dividing up a pension on divorce is one of the more recent options the courts have provided, referred to as ‘pension sharing’ or ‘pension splitting’.
This is often seen as the easiest way to ensure a clean break in divorce, as the pension is divided by completely separating the ex-spouse’s entitlement from the existing pension scheme. The pension’s value will be assigned as though the member retires on the date of the valuation.
The Court will issue a Pension Sharing Order which will dictate the amount of money to be given to each person. It should be noted this is rarely a split for half each. The amount will be a percentage of the overall value of the pension, as opposed to a fixed lump payment. This means, should the pension be valued higher or lower than predicted, the share will be proportionate to this.
The ex-spouse has two options of what to do with this money, and can either become a separate member of the scheme in their own right (through an ‘internal transfer’), or transfer the money out to another holder entirely, often an insurance company (an ‘external transfer’). Transferring out will almost inevitably involve transfer costs in addition to the fact that the overall transfer value may amount to less than what it was in the original pension scheme. Obviously, these costs will play an important part in the decision of whether it is beneficial to transfer out, after all. Once an internal or external transfer has been made, the ex-spouse is then entitled to all the normal increases that members with frozen pensions are permitted.
Pension Earmarking – SPECIFIED AMOUNT
This is where a pension payment of a lump sum is given to the ex-spouse. Though the money is not accessible straight away, it is effectively ‘ear marked’ by the Court as a specified amount for their benefit and can only be retrieved on the pension member’s retirement or death. This payment may also take the form of regular pension payments, however will cease on the member’s death or if the person receiving the payment remarries. The advantage of pension earmarking is that it allows the pension scheme to remain untampered with until retirement, where a payment of a tax free lump sum is given in accordance with the order. However, it does prevent a total clean break as this option prevents complete financial independence and typically involves waiting until the pension member retires before any money can be accessed.
Pension Offsetting - ASSETS
This approach to pensions is extremely simple. It happens when a spouse decides to give up their future pension rights in return for another asset, such as the Family Matrimonial Home. The pension rights are effectively off set against others, once all assets have been considered in order to try to reach a fair balance. This approach is obviously dependent upon having a number of substantial assets and it should be noted that the judge in one of the leading cases on pension offsetting ruled that assets cannot simply be compared on a straight forward like-for-like basis. These factors make pension offsetting less popular, however this was the norm prior to the Courts introduced Pension Sharing, and may still be the most suitable approach for some divorces.
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