I’ve recently been advising a client who is going through a divorce just a few years before retirement. For privacy reasons the details have been removed, but her situation is very typical of what many people experience. She is now at the stage of deciding how the pension should be divided and we are working closely with her to model different outcomes.
If you’re in a similar position, the following overview explains the typical steps involved and the main options for dividing pensions in England and Wales.
Financial Disclosure
The first stage in any divorce is full financial disclosure. This includes both parties disclosing all pension arrangements they have. Therefore, both our client and her ex-husband were required to disclose all of their current and former workplace pensions and any separately held SIPPs they had taken out. Pensions are treated as matrimonial assets, which means they must be included alongside property, savings, and other investments, regardless of whose name they are in.
Our client had lost track of some of her old pension schemes, so our role involved helping her identify her pensions and contacting the scheme administrators to understand whether the pensions were still active.
Valuing the pensions
The next step is to understand what each pension is worth. This is usually done using a Cash Equivalent Transfer Value (CETV). While CETVs are easy to obtain, they can be misleading for certain types of pension scheme – especially defined benefit schemes.
For our client, her ex-husband had a defined benefit Civil Service pension. Rather than being a pot of money, this type of scheme is a guarantee to a defined level of pension income in the future. Therefore, the scheme’s trustees calculated an equivalent pot required to fund the future annual income.
When we reviewed the CETV, it became clear that it didn’t fully reflect the true value of the guaranteed benefits the scheme provides. In fact, buying an equivalent income on the open market would have cost significantly more.
Deciding how pensions should be divided
Once pensions have been valued, the next stage is to decide how they should be divided as part of the overall financial settlement. This may be agreed between the couple or decided by the court. The key aim of this stage is to achieve fairness between the parties, taking into account needs, ages, income, and future retirement provision.
We are working alongside her and her solicitor at the moment for this stage. We are using cashflow modelling software to map out what her retirement could look like under the various options available. The main options they have available to them are:
- Pension sharing: a percentage of a pension is transferred into a pension in the other person’s name. The outcome of this is that each party will have their own separate pension arrangement and can retain control over their future retirement planning. This is the most common approach as it creates a clean break for both parties and means neither person is reliant on the other to secure retirement funding in the future.
- Pension offsetting: one party retains more or all of the pension, in exchange for the other receiving a greater share of non-pension assets. This could mean they receive the family home or cash savings. As pensions, cash and property are all taxed very differently, a pound in a pension is not equivalent to a pound in cash. Consideration should also be made to the age at which funds within pensions can be accessed.
- Pension earmarking: part of a pension’s income or lump sum is redirected to the former spouse when benefits are eventually paid. This option is now relatively uncommon, as payments depend on the member’s retirement decisions, stop if a spouse remarries and usually stop on their death.
Next steps
Once an agreement or court order is made, her next steps will be to set up a pension which can accept the benefits and liaise with the schemes to implement the order. Soon we will be providing our client with this specific advice and help her to implement the order efficiently.
If you are in a similar situation and would like further details as to how Wingate Financial Planning can support in your proceedings, please get in contact through the ‘Contact Us’ section button below.
