Methods of dealing with pensions on divorce
How will pension benefits be dealt with on divorce or dissolution?
There are 3 methods by which pension benefits are usually taken into account on divorce (or dissolution of a civil partnership). However, each case is determined on its own individual facts and circumstances.
1. Pension offset
This is the oldest and most commonly used method of dealing with pension benefits in a divorce. The value of the pension assets is taken into account in valuing the couple’s assets, but both keep their own pension rights, with the pension values being offset against other assets, such as the couple’s home.
In England, Wales and Northern Ireland, offsetting considers the total value of any pension rights accrued, and then looks at the total assets of each individual. In Scotland, the same principle applies, but the law dictates that accrual is based on the pension rights accrued since marriage or registration of a civil partnership.
Offsetting is likely to remain the preferred choice for the majority of couples.
This is where all (or part) of the pension benefits of one of the couple are ordered to be paid to the other, once they come into payment.
Earmarking does not achieve a clean break and does not enable the ex-partner to receive retirement income until the other one decides to retire. This means that the person with the pension benefits retains control over the arrangement(s) and can deliberately defer retirement until their 75th birthday in order to deprive the ex-partner of benefits at an earlier date.
An additional drawback to earmarking is that, if the order is for the regular payment of a pension, those payments will stop when the spouse or partner with the pension pot dies, or if the party receiving the earmarked pension remarries. Because of this, earmarking orders are relatively rare.
3. Pension sharing
This is similar to earmarking but involves splitting the pension at the time of divorce or dissolution, to give both parties their own pension pot for the future and thereby create a ‘clean break’. The ex-partner’s share can either stay in the existing pension scheme (if this is an option) or transfer to another pension scheme of their choice. This could be a personal pension, stakeholder pension or an occupational pension scheme, if the receiving scheme rules allow. Alternatively, they can purchase a lifetime annuity if they are aged 55 or over.
Changes to pension sharing regulations since 6 April 2009 mean that pension credit held in occupational pension schemes can be paid before normal benefit age (which is usually between 60 and 65).
In England, Wales and Northern Ireland, pension sharing must be formalised in a pension sharing order of the court. However, in Scotland pension sharing may be activated either by a pension sharing order or by a qualifying agreement.
None of the above options are mandatory. It is up to the parties concerned and their lawyers and, if necessary, the courts, to decide on the best method. A combination of methods can also be used but the rights from a given pension arrangement cannot be both shared and earmarked.
Changes to pension sharing regulations from 6 April 2009 now allow pension credit held in occupational pension schemes to be paid before normal benefit age (which is usually between 60 and 65).