Pensions in divorce; the possible pitfalls - Sharon Giles of Willans LLP solicitors
Pensions are all too often overlooked in a divorce, yet they are often one of the most valuable resources that a married couple have, writes Sharon Giles, partner and head of divorce and family law at Willans LLP solicitors.
When couples split, they are distracted by immediate issues faced such as sorting out extra housing needs, sharing the care of children and finding the money to pay for it all.
Pensions don't take priority, but they should as everyone has a need for security of finance in retirement, how else do the bills, and hopefully holidays, get paid for? Not dealing with pensions properly on divorce can lead to financial difficulties later in life - and basically an unfair financial settlement.
There are three ways in which the court can deal with pensions on divorce:
- A pension share order - this transfers a percentage of one party's pension fund to the other and so it becomes their own fund.
- A pension attachment order - this transfers a percentage of one party's pension income to the other. The problem here is that when the pension owner dies the income stream dies with them.
- A pension offset arrangement - this involves one party trading pension claims for other resources, usually a cash lump sum or larger share of equity in a property, eg. the family home. The problem with offset arrangements is that there is no precise formula for working out what the exchange rate should be. Pension assets vary greatly in their values and other benefits on offer.
Generally, pension share orders are by far the most precise and secure option and are favoured by the courts and professionals.
In any divorce the parties should immediately request valuations or the Cash Equivalent Value, (CEV) for each of their private pension funds and also a state pension forecast, another matter which is often overlooked.
A major pitfall here is that the CEV does not always reflect the true value of the fund concerned, particularly with defined benefit schemes, and so parties are often well advised to invest in specialist advice from a 'pensions on divorce expert' to ensure that a fair outcome in their particular case is reached. Family lawyers are not financial advisors and so work collaboratively with other professionals to ensure appropriate non-legal advice is secured, or at least offered, when needed.
With complex pension resources the benefit of investing in specialist financial and/or pensions advice far outweighs the potential long-term cost to the divorcing couple of not dealing with their pensions properly and getting it wrong.
Sharon Giles is a partner and head of Willans' Legal 500-rated divorce & family law team. She specialises in complex financial matters often involving business interests, significant pension resources and/or properties and investments owned abroad.
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