Divorce and sharing your pension – what do I need to know?
A recent survey by Aviva insurance company revealed that one in six people did not know that their pension might be affected by their divorce. The research regarding 1000 people found that 8% of them did not have their own pension provision and had been relying on their partner to finance their retirement. As a result, 19% said they would be significantly worse off in retirement in the event of divorce. Almost a third had not made any claim on their partner’s pension upon divorce.
In April, the “no-fault” divorce rule changes came into force in England and Wales, which means that married couples can start proceedings without apportioning blame. The report states that it is important for couples who are separating to understand the impact divorce will have on their finances, including pensions. The Office for National Statistics showed that 103,592 divorces were granted in England and Wales in 2020. This total may increase in the coming years because of the no-fault divorce rule changes.
After the matrimonial home, pensions are usually the greatest asset within a marriage. It is therefore imperative to deal with pension sharing on divorce, by seeking a financial settlement with your former spouse. However, it is common that one person may have a significant pension while the other may have little or none. It can often be a complex issue which is often best achieved by obtaining a pension sharing order, which is a type of court order that makes your financial settlement legal and binding for both parties.
What is a pension sharing order?
A pension sharing order is a mechanism used by the court that enables pensions to be divided (not necessarily equally) in proceedings for divorce or civil dissolution.
Before pension sharing was introduced in December 2000, a spouse who had not worked during the marriage might be left with no pension entitlement at all after a divorce. However, since then the law allows a couple to make a clean break order, dividing any pensions between them or creating a new personal pension for the other spouse. The separation of pensions between spouses following a divorce is done by the way of obtaining an order from the court.
How does a pension-sharing order work?
Pension sharing is one of the options available when you divorce. It allows for a clean break between the couple as the pension assets are divided straight away. This means that each party can decide what to do with their share independently. If the couple decides that it is the right option for them it is important to know that it can only happen with a court order because pension providers cannot make changes to anyone’s pension without instruction from the court. Once the assets have been assessed the court will award a percentage of one person’s pension value to the other person, this is known as pension credit and the amount deducted from the other party is known as a pension debit.
The exact amount of the pension credit will not be known until the court order is finalized. The amount to be transferred should be a percentage of the cash equivalent value (CEV). However, the CEV can fluctuate considerably over time because of the stock market so it is important to use the most up-to-date valuations.
Pension sharing is not an option for couples who have been living together but who are not married.
As this is a complex issue, it is important to seek the advice of an experienced family lawyer so please contact us on 01492 874774 or 596596 for more information, help and advice.
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