Podcast - Pensions in Divorce

Transcript

Paul

A very warm welcome to another podcast episode with Warners Solicitors, and today I’m with Charles Tennant. Charles is a partner with Warners Solicitors and specialises in family law, and today we’re going to be focusing on pensions and divorce. 

Now, when a couple divorces or dissolves their civil partnership, pensions might be the last thing on their mind. However, your pension could be one of your or your partner’s most valuable assets, so it’s imperative to consider pensions when you’re working out how to split your finances. So, Charles, how will my pension be divided in these situations? 

Charles

So there are effectively three options that are available in the divorce situation. The two most likely are what’s called pension sharing or pension offsetting, and then there’s a third, very unusual option called pension attachment. If we talk about pension sharing, firstly, pension sharing is relatively new. It’s only been in place for approximately 20 years and in the event of pension sharing, what happens is that if, for example, one person has a pension fund that sets worth £100,000 and that’s shared equally, then half that fund is sent off to the other person and they have their own, completely separate pension which they can then choose to invest, subject to the rules, with their pension provider. Potentially and certainly they can choose when they draw down and how they draw down, whether they take a lump sum or whether they take an annuity, etc. So that’s pension sharing and that’s often the fairest way and the most precise way of dividing pensions. 

The other option that one sees very often is what’s called pension offsetting. Now, that’s where the pensions are left alone and, instead of them being formally divided by way of a pension sharing order, what happens is that actually, one person says ‘I’m going to hang on to my pension’ and then the other person says, ‘okay, well, I need to have some extra cash, some extra capital to make up for it.’ Now there’s a real difficulty with pension offsetting, which is that it’s an imprecise science. In fact, I’m not convinced it’s a science at all, it’s probably more of an art. 

And indeed, a few years ago there was a very interesting academic article. I won’t bore you with the details of it, but what’s interesting is what the title of the article was. The title of the article is Pensions and Apples and Apples, or Apples and Pears. The real key point is that if one person has one pension and it might appear to be worth, for example, £100,000, and another person has a completely different pension with a completely different provider, and on paper, that’s also worth £100,000, you might think simplistically oh, that’s fine, everyone’s got the same pension. But if it later turned out that one of those pensions was what we call the defined benefit pension scheme, otherwise known as a final salary pension scheme, and the other one was what we call the defined contribution scheme or a money purchase scheme, actually they’re very different funds. The likelihood is the person who left that arrangement with the defined benefit or the final salary schemes probably got a much, much better outcome. What you tend to find is that the income that is generated, the value of that pension, is much greater than it would be if it was an equivalent money purchase or defined contribution scheme. 

So that’s pension offsetting, it can be very complicated and not easy, but it’s well liked because it’s simple and because often what we find is that certain individuals want to hang on to their pensions and certain individuals are not so worried about pensions, and perhaps more interested in hanging on to capital, for example, being able to hang on to the family home. 

I spoke very briefly and I’m not going to say a great deal about pension attachment. That’s very unusual. Now, the reason it’s unusual is that if you have what’s called a pension attachment order, then the pension attachment order dies with the pensioner. For example, if there’s a pension attachment order from one individual to the other and the person with the benefit of the order continues to live but the payer dies, then the pension dies with them. So it’s not something that many people should be keen to explore for obvious reasons and it’s not something we see at all regularly. 

Paul

Now, so, in essence, will I have to split my pension 50-50? 

Charles

Potentially yes, but probably not. It’s much more complicated than that. Firstly, of course, you’ve got to establish what pensions each person has, and obviously, what doesn’t tend to happen is that one person has all the pensions or one person has a precise percentage. Then you’ve got to establish, as I explained earlier, what the real value of those pensions is and, as briefly mentioned earlier, the difficulty is what’s called the transfer value, or the capital value that’s used for divorce purposes. This is not always a reliable indicator of the true value of the pension. But certainly, after a long marriage, then there is a strong likelihood that pensions are going to be shared broadly equally; whether or not it’s absolutely 50-50 is by no means certain, but certainly broadly equally. 

Paul

And if I’ve built up a large pension pot before I got married, do I have to split the total value of my pension with my ex-partner? 

Charles

That’s a contentious issue and the relatively recent case law is that if, for example, you had someone who contributed their pension for, say, 30 years and for the first 15 years they were not married, but for the second 15 years they were. In that sort of scenario, there’s a really big risk that, yes, they would end up having to share half the entire pension, including all those contributions made before the marriage. If you take a different scenario, a much shorter marriage, perhaps you contributed to your pension for 10 years and then you’re only married for two or three years, so when you get divorced, you’re in your early 40s. In that scenario, you might avoid a pension-sharing order altogether. But certainly, if you’re talking about a marriage of any sort of reasonable duration, so probably 8, 10 years or longer, and if you’re talking about a marriage that’s generated children, where you’ve had a family, then you are looking very much at the risk of having to share your entire pension, irrelevant of when you contributed to it. 

Paul

Thank you for that, Charles. Now I don’t have a workplace pension, for example, or a private pension. Will I have to split my state pension? 

Charles

The simple answer is probably not, no. In theory, there is something called an additional state pension, and theoretically, that could be subject to a pension sharing order, but that’s very unusual. So no, 9 times out of 10, you hang on to your state pension entirely. 

Paul

I’m sure that’s very good news for some people. Now my partner has a final salary pension. Will I get half of the current face value? 

Charles

So this goes back to the point I was talking about earlier, which is the issue of what a pension is worth. And the answer is no, you probably won’t get half the face value. You may get half of a greater value. The difficulty is that with the final salary, these defined pension schemes, the transfer value, and the capital value that’s used for divorce purposes are often undervalued. So actually, the possibility is in that scenario that you get a pension share that’s greater than half the current face value. And this comes to the key point about pensions, which is that pensions are enormously complex. 

Different schemes operate in different manners, they have different administrators and it’s a grave error, either as an individual or as a solicitor, to believe that you are a pensions expert. If there are large pensions, then it is nearly always going to be the right decision to get some pension advice. Initially, you might be able to get that from a pensions IFA, but subject to the initial comments they make, their preliminary reviews, and certainly if there was a defined benefit or final salary scheme, in that sort of scenario, you’re probably going to need what’s called a pension sharing report. That’s probably going to have to be prepared by some form of pension actuary or other pension expert. The truth is that it’s a big risk for you, the individual, or your lawyer, to try and decide what is fair when it comes to pensions without that expert advice and guidance. 

Paul

Charles, thank you for covering those points. As you say, this is a very complex area of law. If people want to get in touch with you directly, how can they do that at Warners? 

Charles

There are several ways. They can contact us by email or telephone and via our website, or you are more than welcome to pop into the office and make an appointment via reception. 

Paul

Do you want to provide your direct email address? 

Charles

Yes, absolutely. My email address is [email protected].

Paul

Thank you for your time today, Charles. I’ve been talking to Charles Tennant, who is a Partner with Warners Solicitors. We’ve been talking about pensions and divorce with Charles. Do check out the other podcasts in this series. You can gain extremely good advice from the Solicitors at Warners from the family team. Please arrange a consultation with one of the team here at Warners Solicitors as soon as it’s convenient for you. I’m Paul Harvey. Please join me next time.