Associate Solicitor, La-Toyah Phillips has written a guide to dividing pensions when going through a divorce. La-Toyah outlines the different types of pensions and the best way to approach dividing them between you and your ex partner.
Pension funds are generally considered matrimonial assets and are thus subject to division during a divorce.
The most common way for this to be addressed is a ‘pension sharing order’ whereby a chunk of one party’s pension pot moves to the other party, for their future retirement.
Proper handling of pensions is crucial, as inadequate arrangements can lead to significant financial losses for either spouse.
This article focuses on the treatment of private pension schemes — defined benefit (DB) and defined contribution (DC) schemes — during divorce and highlights the vital input of Independent Financial Advisers (IFAs) and actuaries.
Pension Types
Defined Benefit (DB) Schemes
These pensions are often also known as ‘final salary’ or ‘salary-related’ or ‘career average’ pensions. Public sector pensions typically fall into this category, as do some company pensions. They typically offer a guaranteed annual income based on salary and years of service, making them generally more valuable than Defined Contribution (DC) schemes. However, valuing DB pensions is challenging because it involves estimating the present value of future benefits, considering factors like life expectancy and inflation.
Defined Contribution (DC) Schemes
These pensions are also known as money purchase schemes and are the most widespread type of pension. In contrast, to DB schemes, they rely on contributions from individuals (and their employers, if it is a workplace scheme) to build a retirement pot. The pot's value depends on total contributions and investment performance, making DC schemes easier to value during divorce.
The challenge arises when both DC and DB pensions are present, as their ‘fair value’ can differ significantly due to differing underlying assumptions.
Pension Division Approaches
There are a couple of methods of calculating the size of a pension sharing order:
- ‘Equality of Value’
This method involves adding up the Cash Equivalent Transfer Values (CETVs) of the pensions, dividing by two, and reallocating assets to balance the disparity.
- ‘Equality of Income During Retirement’
This more complex and thorough approach aims to achieve balanced retirement incomes. It requires an expert, such as an actuary or IFA, to assess the pensions' true value, including any hidden benefits and their projected incomes, and to provide a recommendation for a fair division.
The Role of Independent Financial Advisers (IFAs) and Actuaries
At pre-Settlement Stage:
IFAs and actuaries assist in valuing pensions accurately and exploring settlement options, ensuring that all implications are understood. Often experts are instructed on a joint basis by the parties to carry out a report to advise on the optimum and fairest method of pension sharing.
At post-Settlement Stage:
They guide managing the received pension assets, advising on suitable investment strategies based on individual goals and risk tolerances, and help adjust retirement plans to reflect the new financial situation.
In summary, careful consideration and expert guidance are essential in dividing pensions fairly and ensuring financial security post-divorce. As always, bespoke legal and financial advice should be sought at an early stage.
