01 Apr Pensions on divorce: why it is vital to take advice?
When a financial settlement on divorce is decided upon all financial assets of both parties are taken into account. Most of those assets, and their values, are obvious, or at least relatively easy to ascertain, such money in a bank account, or the former matrimonial home.
Shrouded in mystery
But there is one type of asset that for many is shrouded in mystery: pensions. As we will see in a moment there are various reasons for this, but the end result can often be that pensions are not properly dealt with. And this has the inevitable result that many people going through divorce are missing out on their entitlement.
The latest confirmation of this phenomenon came from the consumer magazine Which?, whose members carried out a survey regarding pensions on divorce last November. The survey, which echoes similar ones done previously, made the shocking finding that only 15% of divorcing couples include pensions in their financial settlement.
The survey is a reminder of how vital it is to take expert advice regarding pensions on divorce.
To be entirely clear, you should never attempt to sort out a divorce settlement involving pensions without taking such advice.
How pensions are dealt with on divorce
Before we look into why advice is essential, we need to quickly consider how pensions may be dealt with on divorce.
There are essentially three ways: offsetting, pension sharing and pension attachment orders.
Offsetting is an arrangement whereby the party with the pension keeps it, but the other party receives more of other assets to compensate them.
A pension sharing order is an order transferring all or part of one party’s pension into a pension belonging to the other party. Pension sharing is the most common way of dealing with pensions on divorce.
And a pension attachment order is an order stating that one party will receive part of the other party’s pension, when the other party receives it.
Why can’t I do it myself?
The first, and perhaps obvious, point is that many people simply do not know what they are legally entitled to. They may not even realise that they may be entitled to a share of their spouse’s pension at all. They therefore must obtain the advice of an expert family lawyer. The lawyer will be able to give them an indication of what they are entitled to, and which of the three methods of dealing with pensions is most appropriate.
The second point is even more fundamental: most people have little or no idea of the true value of their spouse’s pension (very often the pension is worth considerably more than they expect). Valuing a pension is not necessarily a straightforward exercise. Pensions are not the same as money in a bank. The most common type of valuation is called a ‘transfer value’ – i.e. the amount that could be transferred from this pension into another. But in certain circumstances, the transfer value is not an accurate reflection of the true value of the pension, as an expert financial adviser will be able to explain (your solicitor can refer you to such an expert).
You will also need a financial expert in relation to pension sharing. It must be understood that you can’t just take a lump sum of money from your spouse’s pension, and transfer it into your bank account. You can only transfer from your spouse’s pension to a pension of your own, and you will need financial advice about the best way to do this.
Lastly, and this is particularly relevant to pension offsetting arrangements, the value of a pension fund is not necessarily equivalent to money. They are two different things, and it may not, therefore, be appropriate (for example) to agree to receive the equivalent value in cash. Again, advice should be sought before entering into any such arrangement.
To repeat: it is absolutely vital that anyone going through a divorce where pensions are involved should seek expert legal and financial advice. Failing to do so could well mean that they miss out substantially on what they are entitled to receive, leaving them significantly less well off, especially when it comes to their own retirement.