Family Department Fact Sheet
Pensions & Divorce / Dissolution
This document provides general guidance regarding financial disclosure. Your family lawyer will be able to provide specific advice based on your circumstances.
The Court will consider pension rights along with all other family assets in financial relief proceedings. Pension rights will be considered when deciding what maintenance and capital should be paid and what capital transfer should be made by one party to the other on divorce / dissolution.
The Court has powers to make a number of different orders in relation to pensions:
A Pension Sharing Order enables the Court to divide pension at the time of divorce / dissolution. The share divided will depend on the individual circumstances of the case and may not be on an equal basis. Instead, the parties are encouraged to negotiate the percentage split, or if agreement cannot be reached, the Court will determine what pension sharing order, if any, should be made.
In cases of pension sharing, it is very important to seek legal and financial advice to determine the pension value, what is an appropriate split for the pension, and to see whether the party receiving the pension share should become a member of the same pension scheme or set up an entirely new scheme by means of either an internal or external transfer. This means that independent advice is usually required from a financial advisor who is a specialist in pensions. There will be charges for independent financial advice which are separate from your legal costs.
This type of order used to be known as an “earmarking order”. In making this order, the Court has the power to make either an immediate order, which means that a percentage of the member’s pension is set aside for the other party to claim on retirement, or a deferred order, requiring one party to pay to the other a regular sum from their pension scheme. The Court can, in addition to, or instead of, make an order requiring one party to cash in the maximum lump sum they are entitled to take upon the scheme maturity and to pay either the whole amount or a proportion of the same to the other.
The Court is also able to order that one party sign over all of the death-in-service benefits to the other party. This is useful as it provides security in the event of death.
In making a pension attachment order, the Court can direct that the Trustees/Managers of the pension scheme carry out the terms of the Court order on behalf of the person with the pension rights.
It is not possible for the Court to make both a pension sharing order and a pension attachment order against the same pension fund.
This means that the value of a pension will be “offset” against another asset such as a house. It does mean that a clean break is reached. For example, one party keeps their pension pot in exchange for transferring to the other party their share of the house. Whilst this does often seem the simplest option, it is very important that you take advice from a specialist. This is because by accepting the house, you are giving up all of your future rights to the other party’s pension. In these circumstances you need to make sure that you calculate how much retirement income you can generate in your own right, either by saving or releasing the equity in the house at a later date.
There are methods of compromise where one party can offer a share in the equity held in the house to be released at a later date in return for a share of the pension.
A Cash Equivalent Transfer Valuation (CETV) or Cash Equivalent Benefit (CEB) statement sets out the value in capital (cash) terms of the pension i.e. income and potential lump sum) that have been accrued to date or are in payment.
With a money purchase scheme, the CETV is the transfer value of the funds that have accrued to date. The transfer value may be different to the actual fund values depending on whether there are any penalties associated with the pension scheme.
The CETV of a final salary scheme rarely reflects the true value of the accumulated pension rights. This is because if the scheme is short of money, the transfer value may be reduced to reflect the underfunding position at that time. This is a very complicated area and, in these circumstances, expert financial advice from a pension actuary will need to be sought.
As previously stated, in the case of pension plans it is imperative to seek legal advice. Some pension plans may appear to have quite a modest value but may be index-linked and therefore likely to increase considerably. It is therefore very important in such cases to have the pension fund properly valued by a pension actuary. It is furthermore necessary for the intended recipient of a pension sharing order to have independent financial advice so that they can make informed choices regarding the pension rights apportioned to them.
Note: The above is intended as a general overview for your information. It is NOT intended to replace proper legal advice. Each case is different, and advice cannot be given without a proper analysis of your own circumstances. (May 2023)
