Separating from your partner can be a messy affair and separating finances is never easy at the best of times. However, one of the most important assets which can become particularly contentious is that of pensions.
The law surrounding pensions and how they should be treated when a couple splits has been revised and updated in recent years but yet remains an area of real concern for many people. We take a look at the options and how the money is likely to be split.
The first steps
If you have decided to divorce (these rules apply to both married couples and those in a civil partnership) the first step is to ascertain the value of the pension. This step is essential, regardless of whether the pension is already in payments.
All pension providers must be able to produce something which is known as a Cash Equivalent (CE) value. This is the figure which is taken into account during settlement calculations. If the pension is not yet in payment, you are entitled to request one CE every year for free. Your pension provider has three months to comply.
Having valued the pension, there are three main ways in which the pension could be dealt with – attachment, sharing or offsetting.
The solution is only available to couples who split after 1 December 2000 and is made available via a Court Order. Sharing involves part of the pension pot being taken to provide for the person making the claim; the proportion which is shared will be stipulated by the court.
If a pension is shared, the person receiving the monies may either be told they must leave the money invested in the same place, or that they must move it to an external provider.
An attachment works in a very similar manner to sharing but focuses on the benefits rather than the investments before they are taken as an annuity. Also only made via a Court Order, an attachment means that an individual receives an certain percentage of the benefits when they become payable. This could include the income, the tax-free cash lump sum and even the death benefits.
Although often described as a settlement option, this is in fact a way of making sure that the pension remains intact and does not have to be split into two. When a pension is offset, other assets which the receiving party wishes to have, are used to offset against the pension and the individual legally agrees not to pursue a claim.
Offsetting can be rather complex as £1 held in a pension is not usually equivalent to £1 held in another type of asset so a discount is usually applied when calculating a fair price.
Unfortunately there is no way of protecting your pension against a claim if your divorce but you may be able to prevent all of your funds being split. Although the law is far from straightforward, any part of your pension pot which was created outside of the relationship or before it existed may be excluded from any arrangement.
The above guide runs through the basics of what you can expect to happen to your pension if you divorce. However, as there are so many different options and permutations, it is always highly recommended that you take legal advice before making an arrangement.