What happens when pension assets are involved in a divorce case? The author of this article considers the issues and how they can be resolved.

The following article touches on the intersection of divorce and pensions. As we know already, remaining private pension schemes will now be subject to inheritance tax. Remaining pension pots can also be a battleground in divorce cases – a topic that Richard Kershaw (pictured below), partner at Hunters Law, examines. (More about the author below.) 

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Richard Kershaw

Recent research published by the Money and Pensions Service (MaPS) has revealed that only 43 per cent of UK adults are aware that their ex-partner’s pension can be included in their divorce settlement. For many divorcees, particularly those who separate later in life, the key priority is keeping a property. In doing so, they often forgo a claim to their spouse’s pension, which could significantly enhance their long-term financial stability.

After the family home, pensions are typically the second largest asset in a marriage. But they are invariably complex assets with varying structures – defined benefit (DB), defined contribution (DC), self-invested personal pension (SIPP), and small self-administered schemes (SSAS) – that are not easy to value. At the top end, it is not surprising for pension pots to be worth more than £2 million ($1.37 million).

Since December 2000, when pension-sharing came into effect, the family court has had the power to order that a pension be shared with a spouse. Pension-sharing orders apply to both occupational pension schemes and personal pension schemes. Since December 2005, the same provisions apply to civil partners on the dissolution of a civil partnership.

Regrettably, many divorcees are unaware that the family court has the power to make a pension-sharing order. Some divorcees can be misled by their ex-partner into believing that pensions are non-matrimonial and therefore not shareable between spouses. The trend towards not using solicitors to advise on divorce only serves to compound the problem.

If granted by the court, a pension share transfers a defined percentage of one spouse’s pension to the other. However, this pension share is not available in the form of a cash sum: it can only be transferred into another pension, not paid into a bank account. However, it is worth noting that for those aged over 55 (rising to 57 in April 2028), 25 per cent of the pension’s value can be taken out as a tax-free lump sum.

An obvious further benefit of pension sharing orders is that they enable former spouses to become financially independent of each other with respect to their pensions. Once the order has been fully implemented, each party has exclusive control of their own pension funds and can plan their affairs accordingly. 

So what procedural steps are required to secure a pension order?

-- Obtain up-to-date valuations of all pensions: request a statement of the value of pension rights within seven days of the first court hearing being notified; within seven days of receipt, the pension information must be served on the other party;
-- Instruct a pensions on divorce expert (PODE). Usually, this will be an actuary or financial advisor who analyses and values pension assets in order to ensure a fair, equitable split, particularly for complex or high-value schemes;
-- When the PODE's report is finalised, parties typically adopt what the PODE has advised, which is then embodied in a consent order with an accompanying pension sharing annex;
-- If agreement cannot be reached, the court will decide what the appropriate pension share should be;
-- The annex sets out what percentage is to be shared, where the pension share is to be paid to (an internal or, more usually, external recipient), and certain administrative details; and
-- Ensure that the pension share is implemented within the required timeframe of four months from the final order.

Despite being aware of the sharing principle and understanding that the pension is a joint matrimonial asset, some spouses nevertheless prefer to receive their share of the matrimonial assets in a tangible form (property, cash) now rather than as a deferred stream of income. Although this can work, care still needs to be taken that the correct calculations are made to achieve a fair division of assets, commonly known as “offsetting.”

It is worth reiterating that in 70 per cent of divorces, the pension is the largest asset after the marital home, so don’t voluntarily relinquish your claim before taking advice. 

About the author
Richard Kershaw is a family law litigator who advises on issues which arise on relationship breakdown, with a focus on complex financial claims on divorce. He is regularly instructed in HNW and UHNW divorces and is known for his expertise in the financial sector, overseas assets, trusts and complex ownership structures. Kershaw has a particular specialism in cases involving private equity interests.

Kershaw is experienced in obtaining emergency injunctions, both to prevent the dissipation of assets and to protect the welfare of a client or their children. He also represents clients in challenging child arrangements cases. In addition to his family work, Kershaw has a complementary litigation practice focused on trust and Inheritance Act disputes arising on the breakdown of a relationship.