Pensions – is it worth the hassle?
Pensions are a hot topic for people divorcing. As family solicitors we are often asked why someone’s husband or wife should get a share of their pension.
The short answer is that the pension has been built up during the marriage. Had that money not been put into the pension it may be held in another asset or savings. Most people would accept that that other assets should be shared.
Why are they so important?
The pensions that a couple have when they divorce can often be one of the largest assets. It can have a value similar to that in the family home and sometimes more.
The process for valuing the pension is however more complex than valuing a family home. The pension is the right to receive income in the future. The method of placing a cash value on that benefit is a difficult one. It will be approached differently by actuaries in different industries. In many cases the value placed upon it does not accurately reflect what it would cost to provide that pension if you were trying to buy one.
There are different kinds of pensions:
- Defined Benefit pension – specifies what you will receive on retirement regardless of what you put in
- Defined Contribution pension – specifies what you put in and the amount you receive will vary
There is certainty as to what will be received with a Defined Benefit scheme and some element of uncertainty with a Defined Contribution scheme.
The process of reaching a fair settlement on divorce will usually involve an independent valuation of both pensions by an actuary and advice about how to equalise the income that each party may retire some years, perhaps many years, in the future.
The closer you are to retirement the more important this is; partly because it is more imminent and partly because there is less time to build up further pension.
The courts can order a pension share whereby one spouse’s pension is transferred into a pension pot owned by the other. This enables there to be a clean break between the parties. However they can also order an offset of those pension assets so that one spouse keeps the larger pension and the other has other assets instead, often including a family home. In such cases there is likely to be an element of guesswork. After all, if you are valuing a pension of £10,000 per year it depends on how many years that pension will be paid (i.e. when someone might die) to assess what the actual value is in cash terms now. And how much should be deducted for the fact that the pension will have to wait for their money whereas the other person is receiving their share now.
The assessment of pensions can include the state pension to ensure that overall there is a fair outcome and that each spouse will have enough income to live on when they retire.
Is it worth the hassle? You cannot afford to ignore it.
Our team are on hand to offer advice on Family matters and you can book an appointment to discuss by calling 0800 160 10 10.
