Why should I read about pensions?
You may want to skip this part but it could be to your advantage if you are middle-aged, close to retirement or female. In fact, you shouldn't jump this section if you have a pension or you don't, whether you are male or female, young or more mature. Well, that about covers everybody, doesn't it?
But I don't understand pensions at all
Basically, a pension is an investment made earlier in life for retirement. Just as investments can go up or down, so can the some types of pensions, money purchase ones for example. It just depends where the pension fund managers invest your money. This is why finding out how much a pension fund is going to be worth can be pure guesswork. But don't be put off. In divorce pensions, we look at a Transfer Value in today's market. This is known as a CETV, Cash Equivalent Transfer Value.
But why should I discuss pensions?
Pensions can in many cases form the largest asset in a divorce. Yes, in many cases it can be worth more than the family home and a good family lawyer should make you aware of this and research the subject carefully with you. A pension could provide some bargaining power and enable you to reach a settlement. Having a pension can mean the difference between enjoying your retirement or being reduced to penury. It would mean the difference between independence and reliance on others. Is this good enough reason?
But it is my husband's pension and nothing to do with me
Wrong. A pension is not his or hers but just another asset which has to go into the divorce pot for fair and equitable distribution, whether you do this voluntarily, through mediation, solicitors or the courts, you should always have good legal advice. The courts have wide powers to apportion pension rights and this should be considered when trying to come to an agreement.
What can my solicitor or the courts do to help me?
Your solicitor can guide you and call upon experts when he considers this to be necessary. This is also the case with family businesses, trust funds and other investments. Your first port of call should always be your family law solicitor but this does not mean that you should not do your homework as this can keep costs down.
Where do I start?
First of all, gather up all available documentation. This is, of course, easier if you are still on speaking terms with your spouse. There is no need to worry if you are unable to get these as your solicitor will request them from your spouse's solicitor and, in the last resort, the courts have the power to order that they should be divulged. But this tends to increase your legal bill. You should also look back at your own working history and contact the firms you worked for to ask whether you have any pension provision. You can also check on your eligibility for a state pension. Keep these documents in an orderly fashion in a file along with your other documents and letters from the divorce process.
But I don't understand what offsetting, earmarking and sharing mean
We give a brief description of these pension terms below When dealing with divorces filed on or after 1 December 2000, the courts now have wider powers to deal with pension rights. This is good news particularly for women who do not have a proper pension of their own and have therefore relied upon the pension provision of the husband. This could, of course, equally apply to men.
Before this new law in December 2000, pensions were dealt with by offsetting and earmarking. Offsetting simply means that one partner's pension is traded against other assets from the marriage to give each other a fair value. This can still be used but problems can occur when the pension is the largest single asset and there aren't any other sufficient assets to trade off against it.
Earmarking has been an option for splitting up pension rights. It means that a proportion of the pension is specified 'earmarked', to go to the wife usually upon retirement. This does not allow for a clean break and the control of the pension remains with the member. The member of the scheme could delay retirement or act in a detrimental way and, of course, the pension would end if the member dies unless there was provision for the ex spouse. This could result in severe financial hardship particularly if the receiving spouse has not had time to build up a personal pension. Another disadvantage is that pension benefits are treated as income for the member even though part is paid to the ex spouse. Earmarking is still used today but more often in cases where the pension is already being paid.
The new law allows the courts to consider sharing the pension fund and thus makes it easier for a clean break to be obtained. The court makes a sharing order which results in the pension member receiving a pension debit. The ex spouse would then receive a corresponding credit. The order is passed to the trustees of the pension fund and they then have four months to implement it. It may be possible to allow the credit to remain in the scheme and the ex spouse would therefore have a special class of membership in the scheme with similar rights to those who have left a company but deferred the benefits in the scheme. The trustees could also insist that the credit is transferred to the ex spouse's scheme or a stand alone scheme.
What are the benefits of pension sharing?
There is a clean split of the pension assets at the time of the financial settlement thus encouraging greater independence. Both spouses have their own pension entitlement which may encourage forward financial planning. Sharing will benefit divorcing women who often have much less provision or none at all. It gives greater flexibility as the previous options of earmarking and offsetting are still available.
Pensions are more important when a wife has spent most of her time caring for the children and home This normally means that she has little or no pension fund in her own name. Another wife nearing retirement age could have expected to have shared her husband's fund, particularly when she devoted herself to the family. Even if she got a job, she would not have time to build up a sufficient fund to support herself in retirement. But even the younger wife should consider this subject carefully as every year lost in pension contributions means that a much higher figure would have to be paid in to her account at a later date.
The courts can, under the new law, consider the following six options and for divorce cases which were filed before 1 December 2000, only the first five options are available to the courts. (Here we refer to the wife as meaning the wife in the divorce proceedings.):
Giving the wife a bigger share of other assets to offset the loss of her interest in the husband's pension
Giving the wife a lump sum to compensate for the loss of specific benefits such as the right to receive a widow's pension
Earmarking part or all of a future lump sum payable on death of the husband for payment to the wife
Requiring the husband to swap part of his pension at retirement (this is known as commutation) and earmarking part or all of that lump sum to the wife
Earmarking part of the husband's pension (either one he takes out a later date or one he is already receiving) to be paid to the wife.
Pension sharing - This would mean that part of the husband's pension rights are transferred to the wife.
Advice should be sought about tax implications on earmarking a pension as lump sums are not liable for tax but earmarking could attract tax of up to 40 per cent. See our article on Financial advisers.
The financial pot
All in all, the financial pot should contain everything for consideration and shares adjusted according to the distribution of each particular asset.
Finding out information yourself
Below we give details of organisations who could assist you but you will have to contact all the places you have worked to check whether you have any pension provision. When you joined your pension scheme or started a pension plan, you should have been given an explanatory booklet outlining the benefits you are entitled to, the rules and details of who to contact. If this is missing, you should ask your employer or pension provider for another copy. Check through it. You should also have recent valuations on file. Again, ask for an up to date pension valuation if this is missing.
There are two types of pension scheme or plan
One is called money purchase and the other is salary related. A money purchase scheme includes all personal pensions and many employers' schemes and the statement should show you how much money your fund has gathered and how much pension you could buy with that money.
But what happens if my spouse won't give me the details?
If your spouse is not co-operative, you should mention this to your solicitor as he can request these from the other solicitor or this could be discussed in mediation. As a last resort, the courts have full powers to obtain these details. Do not be put off. All policies should eventually go into the pot and their value could be at least as important as any property. The statement from a salary related scheme should show you how much pension you might get based on your present salary.
What does the court need to know if we can't sort out the pensions?
The court, both spouses and your solicitors will need to know the value of your pension rights as a single sum. This is known as the Cash Equivalent Transfer Value or CETV. This is the sum of money which a pension scheme could place into another scheme if so agreed or ordered by the court. Do bear in mind that the courts have wide ranging. In a money purchase scheme, this is the amount of money already accumulated less any transfer charges. On the other hand, it is more complicated in a salary related scheme. The CETV is the cash sum which, if invested, could provide the pension you have been told to expect. Here an actuary has to work out the CETV bearing in mind the predictions of stock market behaviour.
Department for Work and Pensions - an good resource
A good place to start when looking at pensions is
The Pension Service This is part of the Government's Department for Work and pensions and aims to provide an impartial guide to many types of pensions.
You can download 'A Guide to your pension options' and many other guides or order them online to be sent by post. There are many useful guides and the phone number is 0845 7 31 32 33. This is a 24 hour ordering line and it is charged at local rate. Textphone users, call 0845 604 2010
Write to: Pension Guide, Freepost, Bristol BS38 7WA
Online Pension Calculator
You can use an online Pension Calculator to work out an estimate of the amount of pension income you could get when you retire from the level of regular contributions that you choose. The Pension Calculator is designed for people who are new to pensions. If you are already investing in a pension you can still use the calculator, but it will only estimate the income produced by your future contributions.
Please pay attention to the FSA's instructions when using this calculator
It is important to pay attention to the Financial Services Authority's (FSA) instructions when using this calculator as it can only serve as a guide and be prepared for a shock. It does pay to start as early as you can and, as a rough guide, you could save as much income that is equals your age. For example, if you start saving when you are 20, you could save 10% of your income up to retirement age. If, on the other hand, you are 40, then you could invest 20% of your income. Always take professional advice. To start you off, click the online Pension Calculator. (When the calculation is made, scroll down for the results. You then have the option of entering new figures, perhaps retiring later and not choosing to receive the tax free lump sum.)
'Retirement. The ugliest word in the language.'
Advisory Service (OPAS) is another good source of help
This is an independent non-profit organisation that provides information
and guidance on the whole spectrum of pensions covering state, company,
personal and stakeholder schemes. It also helps any member of the public
who has a problem, complaint or dispute with their occupational or private
pension arrangement. This work is carried out mostly by a network of
volunteer pension professionals spread throughout the UK. All of the
volunteers are people who work or have worked in the pensions industry
and do their OPAS work in their own free time.
National telephone helpline 0845 6012 923
Calls are charged at local rate. The Helpline provides information and guidance on any aspect of occupational or private pension provision. This help can only be of a general nature as they do not hold any pension scheme records nor can they give specific investment advice. They endeavour, however, to ensure that their advice is totally independent and impartial. On the helpline they will also try to answer any question you have about the State Pension Scheme. Once again, they do not hold any personal information and will be unable to answer specific questions about your own state pension entitlement.
This is an entitlement for people aged 60 or over living in Great Britain. This could mean extra money for you every week. Pension Credit guarantees everyone aged 60 and over a minimum income. See Pension Credit for further details.
New pension plans
For information about setting up a new pension plan, please refer to our article about Financial advisers and have a look at our Books section. You can use our Find a solicitor service in our legal section.
If you haven't already read the articles in Legal Aid about Obstacles and financial settlements, you could check back there. Please make sure to consult a family law solicitor.
'It is thrifty to prepare today for the wants of tomorrow.'