Pensions are probably the biggest headache for a family lawyer when it comes to a divorce. The simple truth is that pensions are complicated and their complexity means that sound legal advice – often coupled with expert financial advice – is always recommended where pensions are likely to be an issue upon divorce.
In his first such communication since joining Watson Ramsbottom, family finance expert Stuart Barton considers the options available.
For over 20 years the Family Court has held the power to make orders for pensions to be shared between divorcing spouses. A pension sharing order sounds simple on paper. A percentage of one spouse’s pension is transferred out of that pension. This sum is then transferred to a pension held by the other spouse. The value of the pension held by the first spouse goes down in value. The value of the pension held by the other spouse increases as a result. So far, so good.
However, pension sharing carries with it many pitfalls and problems. To name just a few: –
- It can be very expensive to implement;
- The pension sharing process is not particularly quick;
- Without expert financial advice the results can sometimes be unwelcome.
It is also very common for one or both of a divorcing couple to have accrued pensions in their own name before they were married. If this is the case, would it be fair that pre-marital pension benefits are also included in any calculation for pension sharing?
It is not a great surprise that for many divorcing couples, pension sharing is not seen as the best solution. The alternative approach of pension offsetting remains the most popular method of resolving the issue. Offsetting is also a simple idea on paper. It is effectively a trade. Rather than seeking a percentage share of their spouse’s pension, the relevant spouse opts to retain a greater share of other assets. These assets are usually ‘cash’ assets such as the family home or perhaps money saved up in an ISA.
Offsetting can avoid the expense and delay of pension sharing. However, it is equally true to say that without expert financial advice, the results can be just as unwelcome as with pension sharing. Because of their unique nature, pensions cannot and should not be valued in the same way like an asset such as the family home. Let’s assume that a divorcing couple have a family home worth £250,000. The husband has a pension scheme valued at the same figure. They agree that the wife will keep the family home and in return, the husband will keep his pension. This may appear a fair trade but in offsetting cases, it is invariably the case that the value of a pension must be discounted to consider issues such as tax or possibly the ‘utility’ value that a cash asset holds when compared to a pension. The level of this discount is not fixed and can be the subject of dispute.
Lawyers dealing with pensions upon divorce have been hampered by a lack of guidance from the Family Court upon the above issues. The majority of reported decisions and cases that have been published upon pension sharing or pension offsetting have been for ‘big money’ cases that bear no resemblance to the value of assets held by most divorcing couples. Applying the principles of those cases to the ‘average’ case is unlikely to produce a fair outcome for those involved.
In July 2019 the Pensions Advisory Group published a long awaited report upon the question of pensions within divorce and produced a set of recommendations to assist lawyers and judges who grapple with these problems every day. It is fair to say the report does not solve the above problems, but it does provide some useful guidance. Some key points that emerge are set out below:
- For most cases, meeting the financial needs of the parties means that the Family Court will rarely have the luxury of distinguishing between pensions accrued before marriage and those accrued after the marriage.
- In ‘big money’ cases, the focus is more upon sharing the assets between the parties rather than ensuring that financial needs are met. In such cases, it is likely to be more appropriate to consider a distinction between pensions accrued before marriage and those accrued after the marriage.
- It is critical that parties and their lawyers obtain accurate and full information regarding the nature of the pension scheme held and identify any factors that may have a bearing upon the practicality/impact of pension sharing or offsetting.
- In cases of pension sharing and pension offsetting, obtaining expert financial advice is strongly recommended. Such advice can provide a clear picture to each party as the value of the pension benefits that they are either losing or gaining, and a degree of insight into the impact of their proposed solution when it comes to retirement.
The expense of obtaining expert financial advice on pensions may often appear unattractive to a party going through divorce. Whenever possible, divorcing couples are expected to jointly instruct a single expert to provide a pension report. This not only shares the financial burden of the pension report between the parties but ensures they are each clear over the questions that the expert is expected to answer. The costs of a pension report are usually more than proportionate in comparison to the value that the report can provide to the parties and their lawyers, primarily as many cases settle once a report has been considered.