Pensions. Not the most exciting of cocktail party topics, but potentially a major cause of disagreement in any separation agreement or divorce financial settlement. LGFL Financial Director and family lawyer Anne Leiper answers the questions many of her divorce clients want to know, in this invaluable Pensions 101 article.
If you’re divorcing or separating, your pension may be the single most valuable asset you have, potentially worth even more than your share of the family home. There has been a lot of legal activity on pensions and separation recently, so I’ll start with the current position.
Are pensions assets?
Yes. Pensions are “matrimonial assets” which means when you divorce or separate, your pensions will be included in your financial settlement. Current guidance and case law makes that quite clear that it doesn’t matter if your pension has been acquired prior to your marriage, during your marriage, or even after you separate. All company and private pensions are considered in their entirety, and yes, that includes your individual state pensions.
When we divorce, is our ‘pension pot’ split 50/50?
Most divorce financial settlements have a 50/50 split as a starting point, but it’s not a “straight down the middle” division as in some USA states. Pensions are calculated differently. The aim is to “equalise pension income as at the date of retirement”. I’ll be using this phrase a lot, so here’s what that means.
Equalising pension income in retirement ensures that you both benefit from the same amount of income if you retire on an agreed date. Not capital, note, income. Pension income allows you to enjoy your retirement and fund your lifestyle for (potentially) 30 years beyond retirement. So no one party is going to “get all the pension”, and everybody's pensions get factored in and valued.
Separating and concerned about your pension share? Call LGFL on 01189 735521 and make an appointment with me. Your initial 1-hour consultation gives us plenty of time to discuss your situation and pension set-up, and I’ll include the first 30 minutes free too.
How do you calculate how much my pension is worth?
Working out the percentage each of you will get of the pension pot as a whole involves some remarkably complex calculations. These take into consideration:
- Your type of pensions
- Your age
- Your gender (men and women have a different life expectancy)
- Any age differences between you
- Other factors
This is not a job LGFL as family lawyers do ourselves - it’s very specialised. Instead, we help you appoint a professional pensions actuary to do the number-crunching and valuing of your pensions. They will also advise how to redistribute the pension assets between the two of you, to achieve that all-important equalisation of pension income on an agreed retirement date.
How do I appoint a pension actuary?
Generally, you both appoint your pension actuary with a joint letter of instruction. You also split the costs of appointing them - after all, they will be working to benefit you both in the long term.
You have to write the letter of instruction in the correct way, and the key is to make sure the correct questions are asked.
- Too many questions, and you’ll spend money unnecessarily
- Too few, and you might not get the whole picture
This is where LGFL comes in. I know the questions to ask, and can also ensure both of you make full disclosures of all your assets, including the various pensions you may both hold. If any arguments arise about the terms and references of the instruction to the pension actuary, that's where our legal expertise and arguments come in too.
What is a pension order? Why do I need one?
Once we've got the pension actuary’s report and we've helped you reached an agreement between yourselves, it's all drawn up into a court order, known as a pensions order. A court seals this order (makes it binding) and that is sent to your pension company, along with your degree absolute. Only then will the pension company be able to split up a pension into one for you, and one for your ex-partner.
Getting that pension order right is crucial to ensure income at retirement and beyond. At LGFL, we use our skill and decades of experience to draft the pension sharing agreement. We also draft the court order, with the pension sharing annex/agreement included.
As part of our bespoke level of service, I always send the draft court order to the pension companies involved for approval before it is sealed by the court. This is to make sure that the order is all correctly done, and that the pension companies will be able to implement it.
Want to discuss more about pension orders and reports? Call LGFL on 01189 735521 and schedule a 1 hour appointment with me, either online or in person.
Will my spouse/partner get all my pension?
As you can see from the above, that is highly unlikely. Instead, your combined pension pots should end up providing an income for both of you into retirement and beyond, on an equal footing.
Does it matters how long we’ve been together before we separate/divorce?
Yes, the length of your marriage can be relevant, and the longer that you have been married, the more relevant this is. For example, if you have stayed at home, brought up the children, and helped your spouse’s career to flourish, a court is not going to put a financial value on that. Instead, it is going to look at long marriages, and say, those contributions are equal to those of the spouse who worked and accrued the pension.
In contrast, if it's a very short marriage, you could argue and say there should be some adjustment to that starting principle of equalization of pension income upon retirement.
I’m getting married for a second time. What happens to my pension?
Again, it’s about equalisation of retirement income. If you come to your second marriage with a large pension pot, and your new partner comes with a lot less, how much they bring will be taken into consideration if it’s a short marriage. If you want to protect any pre-acquired assets including pensions for the benefit of your first family, then you should look at a prenuptial agreement.
Can I ring fence my pension with a pre-nup?
Courts like pre-nups. A court will look at a properly drawn-up pre-nuptial agreement and say,
“These are two sensible people. They've come to this arrangement having taken proper advice.” It may well be that in your pre-nup agreement, you say, “Right, we will each keep our own pensions that came in with us to the marriage or the civil partnership”.
You can't totally bind the court with a prenuptial agreement. However, a court is more likely to think that if you and your partner have taken the time and trouble to reach this agreement, why should we overturn it? (We’ll be exploring the benefits of pre-nups for pension in a future article.)
Need advice on a prenuptial agreement? Call and make an appointment. We have helped dozens of couples define what they bring to a marriage, and secure them for consideration in any future separation. 01189 735521.
Do I keep my own pension scheme or do I join my partner’s pension scheme?
It depends. Some companies may not let you stay with them after your pension is split, and insist that you take the whole pension out. Others may allow you as a new customer to have your pension with them, in your own name.
Don’t be over-concerned about this. Once you have a separate pension, you can do what you like with it - draw down on that at the age that you are entitled, or continue to make contributions into it. I always recommend at this point you take professional financial advice as to how best to deal with your ‘new’ pension to secure that all-important retirement income.
When we divorce, do I need to change the name of the beneficiary with my pension scheme?
It all depends how far down the divorce process you are. If your divorce proceedings are ongoing and you're still technically married or in your civil partnership, changing the beneficiary won’t prevent your spouse calculating their share in your financial agreement, to achieve equalisation of income.
What’s more, your pension company is obliged to consider spouses. You may want to put a new nomination in place for your new partner, but until the divorce or final termination of relationship document is through, that new nomination may not be effective. What’s more, if you die during your divorce proceedings, there may well be a dispute over who gets your pension.
Once you've got your pension order and the percentage division of pensions have been dealt with, that is the time to change your nominated beneficiary under your schemes.
Concerned about any financial aspect of separation or divorce?
I am more than happy to help you. Please book an appointment to see me at our discreet Wyvols Court office, or book an online consultation in the privacy of your own home. I relish the challenges of creating financial settlements that achieve the best outcome for you, your family and your lifestyle after the end of your marriage, a civil partnership or long-term relationship. Call us on 01189 735521.