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Pension Pains – what happens to my pension if I divorce?

After the matrimonial home, a long standing pension is often the most valuable asset to be determined as part of the financial settlement portion of divorce proceedings.

But the truth is, pensions can be hideously difficult to split between former spouses.

Here at Wards Solicitors we always try and encourage our clients to negotiate as much of a settlement as possible – this will avoid incurring unnecessary legal fees and can help keep the ‘heat’ out of the relationship breakdown.

Unfortunately, pensions are one of those areas where most people will probably need some legal help to make sure that the eventual settlement is both fair and legally enforceable.

In this blog, we aim to help you to understand the general framework of how pensions are divided, the issues that often arise and to enable you to formulate the right questions to ask your legal adviser.

The Basics 

As the old saying goes, there’s more than one way to skin a cat. In fact, when it comes to sharing a pension, there are actually three main ways. These are:

  • Off-Setting;
  • Pension Sharing;
  • Pension Attachment.

Focussing on these three main areas – although there are many variations – provides a good, general understanding of the key points you need to know. 

Off-Setting is relatively straightforward. In short, the person who has the pension decides to take less of the current pot of available assets (such as the family home) in order to keep their entire pension for the future. 

Pension Sharing does exactly what it says on the tin but uses a piece of legislation that came into force in 2000. The pension is ‘split’ as part of the overall pot of assets, and the person who is receiving their slice can either choose to re-invest it – in their own new pension pot for example – or keep it as part of their spouse’s existing pension, if the pension scheme allows, for cashing in at a later date.

Cashing in at a later date is the third main way of dividing pensions. This is known as Pension Attachment, or ‘earmarking’ which portion of the pension fund is to be for the spouse on their retirement.  The payment of the ring fenced part will only be triggered when the ‘owner’ of the pension begins to receive theirs. 

Valuing the Pension 

Whichever method is adopted, the parties will need to know how much the pension is really worth as many can have additional benefits which boost the overall value of the fund.

Old calculations as to future value are rarely reliable and an expert’s report may be required. As an example, if the type of pension concerned relies on investments or the stock market, the value on a given date can fluctuate significantly and therefore an expert’s report can often help to ‘even out’ these fluctuations, or at the very least, make a best guess.  This type of report is usually called a ‘Pension Sharing Report’. 

What next? 

Pension Sharing and Pension Attachment can only be done with a court order so legal advice is important even if you and your former spouse have managed to divide assets amicably.

To keep legal costs to a minimum it can be helpful to collect together all of your pension paperwork and to get an up-to-date ‘cash equivalent’ valuation from your pension provider before you see a solicitor.

Once this material has been collated, Wards Solicitors Family Law and Divorce Team will be able to give you a pretty good idea of what to expect and the pros and cons of each type of pension splitting.

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