Many people do not realise that the only way you can share a pension pot is by getting divorced. And its not quite as simple as just obtaining your final order of divorce- you need a specific order from the court compelling the pension provider to put the share in place.
Rebecca Massam – Partner
When couples separate and divorce, part of that process will involve dividing the assets from the marriage and making two households out of one. Dividing up cash, savings and the family home can be relatively straightforward, but sharing pensions can be more complex and in fact, are often overlooked. This is increasingly significant now that couples are more often issuing divorce proceedings themselves without legal taking advice about the full scope of issues that may affect them on divorce.
Pensions can be shared just like any other marital asset, creating two separate pension funds out of one. Each spouse will then have their own fund is theirs to manage and which will pay out when they retire. There are a variety of types of pension schemes with differing approaches to calculating the eventual pension payments and how much one particular pot ought to be shared will depend upon lots of different factors, including whether a scheme is based upon defined contributions (for example, a private pension where a set amount per month is paid into the fund), or a defined benefit scheme (for example, a final salary pension scheme), which is calculated by a formula based on the earnings history, years of service and age, rather than depending directly on individual investment returns.
Alternatively, experienced investors or company directors may have a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS) which might include a portfolio of assets such as commercial property, woodland, shares and business investments. It is worth noting that it is possible for a couple to have their own pension funds of the same size but that will produce different income in the future. It is important then to look at how is best to value the funds and achieve a split that is fair to both parties.
Valuing the pension
The starting point is to contact your pension provider to request an up-to-date valuation of your pension or pensions – one is required for each pension you have. You will then receive a written valuation (or CEV) in respect of the pension, which says what the pension fund is currently worth and your expected pension payments.For most private pensions, that valuation will usually be sufficient to provide accurate information to allow you to determine long-term arrangements. However, for SIPPs, SSASs and defined benefit public sector or armed forces pension the CEV may not be a true valuation of the pension fund and the CEV provided may be lower than the actual or true value of the pension.
This can arise for a number of reasons, for example, where one party is a serving police officer who has 24 years and 364 days service- their pension provider says she has a CEV of £250,000 but 24 hours later, when she has attained 25 years service, that pension may be worth £350,000. Additionally, where the pension fund includes property investments, values may change significantly particularly if planning permission for development is obtained. An acre of agricultural land may be worth £20,000 today, but with planning permission for a solar farm or a business park, its value could increase tenfold.
The benefit of an actuarial valuation
A pensions actuary is an expert in pensions and the nuances of each scheme and will be able to provide an accurate valuation of the pension fund and expected payments. They can provide a report setting out the most efficient way to share a pension, or a group of pensions, to ensure all the fund benefits are maximised, and that both parties have equality of either fund or income. They can also provide calculations which look at drawing down any lump sums which may be available or excluding finds which were acquired prior to the parties getting married.
Can I claim against a pension that is already in payment?
Yes. Just because your spouse is already receiving their pension, it does not mean that the pension fund cannot be shared. However, it may be necessary to obtain an actuarial report to assist with calculating the appropriate method of and percentage to share.
What about state pensions?
It is possible in certain circumstances to have a pension sharing order against your spouse’s state pension – this might be particularly relevant if one party has not worked sufficiently to build up their NI contributions and so is not eligible for the full amount of the state pension.
In some cases, it might be preferable to keep the pension intact and provide one party with a larger capital sum. For example, when one party earns a modest amount, they might struggle to raise a mortgage to buy a house. If the higher earner has a large pension pot, they might prefer to keep the whole of the pension and (subject to appropriate valuations) give their spouse more capital in exchange. This is known as offsetting, however, pensions and capital cannot be compared on a pound-for-pound basis and it would be prudent to obtain advice about this before reaching an agreement.
As can be seen, pension calculations are complex, but your financial security in your old age may be at stake and so it is vitally important to seek legal advice from a solicitor who will be able to explain to you in more detail about how to share any pensions and how to obtain accurate valuations.
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