Divorce and Pensions
Dividing up the assets of a couple whose marriage has ended can be complicated.
When it comes to pensions, a divorcing couple has a number of options:
Pension offsetting is where the court allows one partner to keep their pension, while the other gets a greater share of another asset, such as the family home.
There are disadvantages. Achieving a fair share of a couple’s total assets by offsetting a pension pot against other assets can be difficult. The pension pot’s value could be higher than the value of a house. Also, pension values usually rise and fall more than property values.
Pension earmarking is when arrangements are made so that one partner’s pension is earmarked to be paid to their ex-spouse when payment time finally comes around. The amount to be paid is decided at the time of the divorce, but the actual payment is not made until the spouse either retires or dies.
Again, earmarking is not an approach without problems. One drawback is that it does not enable the ex-spouse to receive retirement income until the spouse with the pension pot retires. Also, if the Divorce Order is for regular pension payments, those payments stop when the spouse with pension pot dies or if the spouse receiving the earmarked pension remarries.
Pension sharing is when the pension is split at the time of divorce so that each partner gets their own pension pot for the future.
Pension sharing involves the issue of a Pension Sharing Order which creates a Pension Credit Member and a Pension Debit Member. The Pension Credit is based on the member’s Cash Equivalent Transfer Value (CETV). The Credit will be a percentage of the CETV, not a fixed sum of money.
This attempt at enabling a clean break for a divorcing couple was introduced as a result of the Welfare Reform and Pensions Act of 1999.
Since 1 December 2000, pension sharing has allowed occupational pension schemes such as final salary pensions, personal pension, stakeholder pensions and the state earnings related pension scheme (SERPS) to be divided between the parties. However, pension sharing does not apply to the state basic pension.
Pension sharing is not compulsory and it is still possible for couples on divorce to select earmarking or offsetting as options.