How is a pension divided on divorce?

Just as properties, cash, stocks, shares, artwork, and vehicles can be shared, divided, and distributed between spouses going through the challenges of a divorce, the Matrimonial Causes Act 1973, also grants the Family Court of England and Wales the power to order that pension assets are also shared. There are a number of ‘pension’ orders available to the Court, however, for the purpose of this article the spotlight will be solely aimed at Pension Sharing Orders (PSOs) as these are most commonly used – the other orders are now seen as a bit outdated.

A PSO is essentially an order, reached either by consent between the parties and then sealed by the court, or made in the absence of such an agreement within contested financial remedy proceedings, that outlines how one party’s’ pension asset will be shared with the other – i.e., how Spouse A’s pension will be shared with Spouse B. Part of one person’s pot is carved out and transferred to the other. There will be a pension credit, and debit, from one spouse to the other. There are two ways that this pension credit (share), can be received:

  1. The receiving party can become a member of their ex-spouse’s scheme in their own right, and have their own pension. This is called an internal transfer, or;
  2. The receiving party can transfer the value of the credit (share) to another pension scheme in their own name. This is called an external transfer.

Figuring out how much your pension is worth can be a challenge in itself. Most pension providers will be able to provide you with an up-to-date Cash Equivalent Transfer Value (CETV) of your pension asset. This CETV is the figure that will be used, usually, within family law proceedings to establish how much your pension is worth and is the figure that the pension provider could transfer to another pension fund at the date it is calculated.

Figuring out what proportion of one spouse’s pension should be shared with the other is even more difficult. Although the CETV of a pension gives the value of the pension according to the scheme’s calculations, it is not always reflective of the real value of the pension. This ‘real’ value is calculated in reference to the wider pension marketplace. Sometimes, the CETV does not take into consideration the value of the benefits or may understate the Open Market Value (OMV) of the pension.

It is usually a good idea to involve a pension actuary to provide the divorcing spouses with the relevant information and calculations. Normally, the calculation will seek to achieve either equality of pension income at a certain age (be that 55, 65, or 67) or equality of pension capital at a certain age (again, 55, 65, or 67). Deciding which to use is something to discuss with a solicitor. To add to the confusion, the CETV of a pension can change over time – even within the months it takes to finalise the financial aspect of a divorce.

Pension sharing orders are usually a good idea if;

  1. One party has a pension, or pensions, with a high value when compared to the other assets involved in the case.
  2. The parties are close to retirement age and will likely find it difficult to build up similar pension benefits in a short time.
  3. The parties are older.
  4. The receiving party would like to nominate potential beneficiaries of any death benefits if they were to die before taking retirement benefits.

In the simplest of terms, pension sharing can often provide one spouse with a pension for later on in life. Overall, pension sharing is part of achieving a clean break (meaning the end of a financial relationship between divorcing couples) and provides greater flexibility and choice for those spouses going through the financially, and emotionally, difficult task of divorce. The involvement of the court will ensure that any division of matrimonial assets, including pensions, is fair and reasonable.