Divorce and Pension Entitlement

Claire Edgar

18 May 2018

When a marriage breaks down and spouses begin the task of trying to negotiate a financial settlement, many are often surprised to discover that one of the most valuable assets in their marriage, particularly if it is a long marriage, is their pension.

It is fair to say that not many people give a second thought at the time of separation to the effect that a divorce may have on their pension, or that they may be entitled to make a claim over their spouse’s pension if it was accrued during the marriage.

It is not unusual for a pension to be a couple’s second largest asset after the matrimonial home and the Courts can take this into account when deciding how to divide assets upon divorce.

Pension freedoms legislation introduced in 2015 now gives pension holders unprecedented control and flexibility over how to draw down their pension funds.   This has had the effect of making the pensions in a matrimonial settlement a much more attractive and valuable asset to the parties.

The Court’s powers to deal with a pension are dealt with under the Welfare Reform and Pensions Act 1999. This legislation allows the Court to make Pension Sharing Orders (where one spouse is given a percentage share of the other’s pension pot ) and Earmarking or Attachment Orders (where part of one party’s pension is paid to other).   Now that this legislation has bedded in, it is widely recognised that only Pension Sharing Orders are appropriate to meet both parties’ needs, and as such Earmarking is almost never used.

Once the values of the parties’ respective pensions are known, negotiations can take place as to how the pensions should be dealt with in the overall division of the assets.   Some parties would wish for the pension entitlement to be ‘offset’ against other assets.  For example, one spouse may wish to keep their pension with the other being compensated by having a greater share of the equity in the matrimonial home.   Where offsetting is either not possible or not desirable by the parties, the Court can will look at whether there should be Pension Sharing Order and if so, how much of the pension should be shared.

It is good practice for an Actuarial Report to be obtained from a pension specialist to assist with determining how much of a pension should be shared. This report can be costly, however it is particularly important where there are a number of pensions to be considered and where the pension provision is substantial.    

Once the amount of pension share has been agreed or determined by the Court then the Pension Trustees will be required to consent to the Order. As soon as they have consented, the Court must approve and make the Pension Sharing Order which will then be implemented by the Trustees of the pension scheme.  

Essentially, the effect of the Pension Sharing Order is for the agreed portion of the pension pot to be credited to the spouse who is getting the benefit of the share. They will then have a pension pot which will pay out to them as their own pension. The other spouse will retain the balance of the pension pot which will also be paid out independently as their own pension.

It is important that any person going through a divorce or separation has a good understanding of their entitlement to a spouse’s pension or to the impact that any financial settlement may have upon their own pension benefit.  At Francis Hanna & Co, we are experienced in providing advice and assistance in relation to all aspects of matrimonial proceedings and can guide you through this process to help obtain the best result for you.