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Separation and divorce:
Pensions

Pensions are often the second biggest asset to be considered in divorce proceedings after the family home.

Often it is a wife who has given up work to look after children and will be relying on her husband’s pension when he retires, with a spouse’s pension after his death. These benefits will be lost on divorce and the loss will be taken into account in the ancillary relief. Depending on her age and earning capacity, she may, or may not, be able to build up her own pension fund to support herself in retirement.

The spouse with the lower (or nil) pension provision has no automatic entitlement to a share of the other spouse’s pension. All factors are considered and if, for example, the wife receives the family home (in order to live there with the children) the husband’s pension may be left intact in the overall division. The equity in the family home could then be utilised to fund her retirement by providing a lump sum on its sale once the children have grown up.

Even if your own pension fund is retained, you will need to consider changing your nomination of who will receive the fund or the death in service benefits away from your spouse.

The are 3 ways of including pensions in a claim for ancillary relief:

  1. Offsetting The cash value of the pension is included in the value of the assets and the other spouse is given assets equivalent to that value or a proportion of that value as appropriate. This can be more practical than trying to divide both the house and the pension but will generally leave the pension with the spouse best able to build up further pension rights, possibly to the detriment of the other spouse even though the value has been allocated ‘fairly’.

  2. Ear marking is an attempt to address the problem with offsetting. The courts have the power to ear mark an appropriate percentage of future pension benefits for the ex-spouse. Ear marking can apply to an annual pension and a pension lump sum. The court can force the commutation of a pension to a lump sum. It cannot, however, force a pension to be taken from a specified age. If a pension is not taken until the latest age possible the former spouse could be financially vulnerable if he or she needed the pension from an earlier. As the order specifies a proportion of the final pension, an unfair benefit could be obtained from future contributions from the divorce until his retirement. On death, before the pension is drawn, any benefit of the ear marking order is lost. As an ear marking order can be varied if circumstances change, If the husband died before he took his pension the wife would lose any benefit of the ear marking order. As an ear marking order could be varied if circumstances changed. It lacks certainty at the time of the divorce. The full amount of the pension remains as the taxable income of spouse with the pension, even though a share is then passed to the wife on. This is not income tax efficient for either party.

  3. Pension splitting or sharing is intended to overcome the above disadvantages. A court can order a pension provider to split the existing pension fund between the husband and wife in the appropriate proportion so that they each have their own separate, independent pension funds. Each spouse can take a pension, subject to the scheme and HM Revenue & Customs rules when they choose. Each party can continue with contributions to their own pension without reliance on decisions of the other.


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