The perils of pension payouts on parting

Given that the UK has one of the least generous state pensions, coupled with an ever increasing retirement age, many people need to rely on a private pension provision to maintain the standard of living they enjoyed during their working years.

Furthermore, as both partners in a married couple may be planning to rely on one person’s private pension during retirement, it is important to ensure that this is possible even if the relationship breaks down – especially as an increasing number of divorcing couples are now in their 60s.

On divorce, the following three methods are currently available to divide the pension income between the two partners:

  • Offsetting considers the pension along with all the other matrimonial assets, and may result in one spouse receiving, for example, the family property to balance out the other’s future pension income. However, as this does not compare like with like, the benefits of retaining the home might, in the future, be outweighed by the need for income in retirement.
  • Earmarking or attachment orders enable a spouse to receive part of the pension, lump sum or death benefits when the pension owner retires or dies. This could cause problems for younger couples due to the delay between divorce and the benefits being received.
  • Pension sharing, which is available to people divorcing after 1st December 2000, divides the pension between the couple. The benefitting spouse can then transfer their share to another pension scheme or, depending on the scheme rules, keep it within the existing one.

Each of these options has their advantages and disadvantages, and it is important to have an accurate valuation of the pension when considering the best way forward – and therein lies another set of potential problems.

Requesting a valuation from the pension provider will usually result in a cash equivalent value (CEV) being provided. However, given the different methods used to calculate the CEV, as well as the potential impact of the date the calculation is prepared to, these may not accurately reflect the actual benefits available.

As a result, thousands of couples may have had their pension income significantly undervalued.

Consequently, it is essential that divorcing couples seek expert advice. Often it is advisable to have a pension report prepared by an actuary – who will review the options available and how they would impact on each partner – and especially in the case of public sector final salary pension schemes.

One final point to consider is that while such schemes are underwritten by the government, and therefore gold-plated, the same is not true for private sector pensions, which run the risk of going bust and ending up in the pension protection fund. This level of risk may, therefore, need to be factored into the settlement.

At Palmers Solicitors, we are highly experienced in advising clients on all areas of family law, including financial settlements on divorce. To find out how we can help you, please contact us on 01268 240000