Pensions are often some of the largest assets in divorce settlements and can also be the most widely misunderstood.
A new report, released in July 2019, provides stark warnings for professionals working in divorce law. We will be looking at several aspects of it over the coming weeks to help you to understand what the report and its findings mean for you and your own divorce.
What are my options when it comes to pensions and divorce?
Pensions held by either partner can be redistributed between a couple upon divorce or the dissolution of a civil partnership.
The least common way of sharing pensions is by a process called a pension attachment order, formerly known as 'earmarking'. This process forces a pension fund to redirect a percentage of the pension holder’s payments to his or her ex-spouse each time the payments become due.
This process has largely fallen out of favour because the ex-spouse would lose those payments if he or she remarried or if anything happened to the pension holder or fund that meant the benefits never came to be paid out in the first place.
The alternative process is called pension sharing. Here the pension fund is divided so that a certain percentage is taken away from the pension holder’s funds following an order of the court and transferred into a pension belonging to the receiving partner. That pension might be with another pension provider or might be with the existing pension trustees but in a separate account in the name of the receiving partner.
The third process is called pension offsetting. In offsetting, the receiving party is said to offset or replace, their claim for a certain percentage of the pension holder’s fund by receiving more immediate capital. A common example of this will be where the non-pension-owning partner asks for or is offered, to keep the house in return for not making a claim against the pension.
How do I know what solution is best?
Pensions will usually require advice from both specialist family lawyers as well as financial advisers.
The Treatment of Pensions on Divorce report sets out detailed guidance on best practices about how the two advisers should work together.
That best practice confirms our current practice of obtaining pension valuation or pension sharing reports, now referred to as Pensions on Divorce Expert (or PODE) reports.
These are prepared by the pension experts. The cost of the report is often seen as an unattractive additional expense and there is a real temptation to avoid incurring this disbursement and instruct solicitors to go ahead without this document.
The recently released Treatment of Pensions on Divorce is helpful in explicitly addressing the inherent risk in doing so when it states that: “Persuading the parties of the value of such a report can be challenging, especially where costs are escalating. However, Defined Benefit pensions schemes (in particular) will often involve £100,000s or even £millions: the financial cost of making an uneducated guess about the pensions with a view to avoiding the relatively modest cost of a [Pensions on Divorce Expert] report and so getting it wrong can be immense for either party (pension-holder or pension- claimant).” Part 1 para 1.6
Are there any cases where a pension report is not required?
There might be divorces or dissolutions where a report is simply not required but it is likely these will be limited to those where the combined value of the pensions is very low and where the pensions are straightforwardly defined contribution or money purchase schemes.
A report might also be less important if the parties are very young or if the pensions represent a very small fraction of the overall wealth available to the parties to distribute between themselves.
You will need to carefully consider the risks of proceeding without such a report before making a decision.
The reports can cost anywhere from £1,000 upwards depending on the number and complexity of the funds. Cutting corners to save this expense will rarely be worth it if there is a risk of losing pension benefits worth tens or hundreds of thousands of pounds.