Aside from the family home, pensions are often the most valuable asset owned by the parties during a marriage. Often, pensions are either thought to be excluded from the financial settlement on a divorce as either the couple assume they will automatically stay in the possession of the party who acquired them, or they find them too complicated and ignore them altogether.
Particularly with divorce for the over 50s on the rise, pensions can often become the most valuable asset in a divorce, whilst simultaneously being the most misunderstood. Such misunderstanding has led to pensions being ignored during the divorce process. As demonstrated in the Fair Shares Report, which showed that in only 11% of the cases surveyed made provision for pension sharing on divorce (only including cases where the pension had not yet been drawn by either party).
Pensions Awareness Week is aimed a raising awareness of the importance of pensions, not just on a divorce but generally to encourage people to think about their personal affairs on retirement. In this article, we aim to raise awareness of the key considerations for couples confronted with thinking about their pensions when going through a divorce.
Find out what type of pension(s) you have and who they are with
Whether seeking an amicable financial settlement on divorce, or pursuing active financial remedy proceedings through the courts, you will be required to disclose the value of all your pension assets to your ex-partner, either way. Understanding where your pension monies are held is the first step in complying with this disclosure obligation. The sooner you understand your pension assets, the sooner you will be in a position to accurately disclose them.
Often pension companies can either be acquired by other pension companies, so your pension provider from your job 30 years ago may be very different to who holds your pension now. You may have to do some digging to find out where your pension now sits, so getting on top of this early will simplify matters later.
It will also help if you have a basic understanding of the types of pension(s) you have. There are various types of pensions, broadly separated as private pensions, workplace pensions, and the state pension. A state pension is paid directly to eligible individuals and therefore not something that can be taken into consideration when deciding the split on a divorce.
Workplace pensions include the increasingly rare defined benefit pensions, where as an employee you will accrue benefits based on your earnings, length of service and membership in the scheme. More regularly, workplace pensions are defined contribution pensions, whereby contributions are made into a pension fund by the employee and employer then invested by the pension company.
Private pensions generally offer larger investments and can include Self-Invested Personal Pensions (SIPPs), which gives the beneficiary of the pension more autonomy over how their money is invested.
Different pension types have unique benefits and risks, so it is always recommended that you speak to a specialist if you want to change the status of your pension.
Familiarise yourself with the term ‘Cash Equivalent Transfer Value’
For the purposes of calculating the value of pensions on divorce, practitioners often use a Cash Equivalent Transfer Value (CETV). The CETV is the value of all the benefits under your pension scheme if they were transferred at the date of the valuation. Sometimes a Cash Equivalent Value (CEV) is used, where transfers out of the scheme are not possible. These valuations may be included in your annual pension statement, but if you require an up-to-date figure, you will need to contact your pension provider.
The wait time for your CETV will depend on where you work (or worked) .and which company takes care of your pension. Issues arise in relation to publicly funded pension schemes (e.g. for NHS workers or teachers) as these are met out of general taxation and there is no general funding reserve. This makes finding a single transfer value difficult and means that receiving a CETV from the pension provider can take months. If you work for one of these bodies, it would be a good idea to request your CETV early on in the divorce process, so it does not delay reaching a financial settlement.
When it comes to negotiating your settlement, any split of the pension will be recorded in a pension sharing order that is shared with your pension company so they can implement the order. Even if you are deciding not to split your pensions, you will likely still need an up-to-date figure for your CETV. When you file an agreed consent order recording the agreed split of the assets, you will need to show to the court that recent financial disclosure has been exchanged and both parties have clarity on the assets of the other. If the CETVs are too out of date, then the court may send the consent order back and ask the parties to wait until they have an updated CETV. This can then cause further delay and potential legal costs in fixing the order.
Be mindful of the potential tax treatment of your pension
Until its abolition in the 2023/24 tax year, the lifetime allowance (LTA) placed a limitation on tax-free contributions into a pension fund. The limit for the last 4 years of its life was £1,073,100. Now it has been abolished, many pension commentators have opined that pensions will become a more considerable asset on divorce as people can grow them even further.
In addition, under current inheritance tax rules, many pensions can pass on death without being recorded on the tax return on death and so are exempt from tax. This represents another incentive for wealth to be kept in pension pots, but does mean there could be more in the pension that would be capable of being split on a divorce.
All of this is subject to change, as the lifetime allowance was a Blair-ite policy, there has been speculation that the Labour Party intend to bring it back, if not in this budget, then in the not-too-distant future. The pension exemption to inheritance tax has also been suspected to be closed or at least have some further regulation in place, especially if the LTA remains at bay.
The tax treatment of pensions in the upcoming Autumn budget will be carefully watched by pension commentators and family lawyers alike to see what the impact will be on divorcing couples, and their potential pensions sharing orders. Advice should always be sought if you are concerned about your pension’s tax position.
Beware hidden costs
Although, on the whole, pension companies are aware of pension sharing orders and responsive to their implementation, some do charge additional fees for implementing the transfer. The associated costs and who will bear them should be considered in the order, to avoid disagreements later on.
Not only can unforeseen fees arise on the split of the pension, some publicly funded pensions require a fee for receiving or expediting the CETV. The NHS, for example, state that the CETV should be available within three months (although we are aware of occasions when it has taken much longer), but this can be reduced to 6 weeks for an additional fee. If this is the one of the only issues holding up a financial settlement, the fee is likely to be worth it, as it may save you legal fees later on if the waiting around for the CETV causes issues with your proposed settlement.
Don’t shy away from talking about your pension
We know that pensions can seem like a complicated topic. Many are apprehensive to discuss them, as they think they know nothing about them, or are resistant to find out more. But a large part of the pension poverty problem on divorce is due to one party ignoring this valuable asset and assuming that because the other party accumulated that money, it is theirs to keep. The truth is that most assets acquired during the marriage can be split on divorce, and the pension is no exception. Having frank conversations with your partner, financial advisor, or your legal team on divorce, can help dispel some of the pension apprehension and keep you in know about this valuable asset.
If you have any questions about anything raise in this article, please get in touch with our family law team who would be happy to help.