In this Technical View we start to look at Pensions and Divorce.
We will be doing a series of Technical Views on this subject over the coming months and how financial advisers can add value to the process.
Before delving into more detail we kick off with an overview.
As we know alongside the family home, for many people their pension is the most important and valuable asset they have.
Since 1996 pension rights must be taken into account in a financial settlement on divorce or on the dissolution of a civil partnership. (When we talk about divorce throughout this article this also covers civil partnership dissolution.)
In light of this it's easy to see why financial advisers can and do play an important and fundamental role, whether this is:
For the pension scheme member – exploring ways in which the person with the original pension rights can build these back up after a divorce settlement.
For the ex-spouse or civil partner who is the beneficiary of the order. In particular, when a pension sharing order is made, an adviser can play an important role advising on the most suitable destination for his or her pension credit rights
So, how can pension rights be taken into account on divorce?
Essentially there are three ways of dealing with any pension rights in a divorce. They can be:
offset against other assets of the divorcing parties;
made subject to an earmarking/attachment order. This is where pension rights are left as they are until they come into payment and remain with the scheme/policyholder. When the pension comes into payment a certain part of the benefits, as defined in the earmarking/attachment order is paid direct to the former spouse or civil partner, with the remainder paid to the scheme member in the normal way. Lump sum death benefits can also be earmarked;
made subject to a pension sharing order, where a clean break can be achieved at the time of divorce, i.e. by splitting pension rights at this time.
None of the options for pension rights on divorce, i.e. offsetting, earmarking or sharing are mandatory. It is up to the parties and their solicitors, and if necessary the court, to decide on the best method. (A combination of methods can be used, if appropriate, but the rights from a given pension arrangement cannot be both shared and earmarked).
Of course another possible option is a judicial separation rather than divorce. The court can make a whole range of financial orders on separation, including earmarking orders but not pension sharing orders. Potentially the spouse/civil partner, who is not the pension scheme member, may receive certain survivor benefits on death, whereas following divorce they may not be entitled to such benefits.
In future Technical Views on pensions and divorce we will look at:
a number of FAQS associated with pension sharing, such as:
Are there restrictions on how an ex-spouse/civil partner can take benefits relating to his or her pension credit on divorce?
How are pension credit rights treated against both the annual and lifetime allowances?
How is lifetime allowance protection affected when a pension sharing order is made?
What are the timescales for finalising pension sharing orders and when does the clock start ticking?
Earmarking / attachment orders and a comparison of how this option measures up against pension sharing.
All in all there's a lot to consider and think about at a time when not every one may be in the most considered frame of mind. A financial adviser can be a key and integral part of this process. A lot of solicitors involved will need financial and pensions assistance in making sure that the various options are explained and appropriate recommendations are made to the divorcing parties.