Pensions on Divorce
In the past women have not received enough financial information and many of today’s pensioners rely on their husband’s employment and financial knowledge for security in their retirement. In some cases this has proved to be inadequate; especially when divorce has subsequently occurred. You need to be aware that your pension rights could be affected by divorce.
The court is required to take the value of any pension held by either party in a divorce into account when the financial settlement is being determined. There are three options available to the court when it comes to deciding how the value of a pension should be treated. These are:
Pension Offsetting – in respect of divorce proceedings since 1 January 1974
Offsetting is widely used. It involves offsetting the value of pension assets against other financial assets so that the party with the pension keeps it and the party without a pension is allocated other financial assets in lieu of pension. Offsetting is used particularly in cases where they are children to be considered. For example, the spouse who keeps the children also keeps the matrimonial home, which could be offset against the value of pension rights. This approach achieves a clean break but is impractical in some cases.
Pension Earmarking/Attachment – in respect of divorce proceedings started on or after 1 July 1996
The Pensions Act 1995 permits courts to make attachment orders in addition to financial orders for deferred maintenance. These orders are sometimes known as ‘earmarking’ orders. An attachment order requires the trustees or managers of a pension when it becomes payable direct to the former spouse on the member’s behalf. Attachment orders can be made against periodical payments or lump sum payments of pension or death in service lump sums. Attachment orders can only take effect when the member’s pension comes into payment.
In Scotland, financial orders for deferred maintenance can only be made against lump sum payments of pension or death in service lump sums. If the court orders the pension scheme to make payments on behalf of the member, these orders are called earmarking orders. The court cannot make an earmarking order against periodical payments of pension.
Pension Sharing – in respect of divorce proceedings started on or after 1 December 2000
Pension sharing enables the value of one spouse’s pension to be shared with the other spouse. If the court makes a pension sharing order the value of the member’s pension is reduced by the percentage ordered by the court. The trustees of the member’s pension scheme are responsible for depositing the amount deducted from the member’s pension in a suitable pension scheme for the former spouse. In some cases the former spouse may have the option of securing pension rights within the scheme operated by the ex-husband’s employer. In most cases pension rights are bought in a different pension scheme. Pension sharing enables a ‘clean break’ to be made. Once the member’s pension has been debited and a pension secured for the former spouse there need be no further contact between the couple for pension purposes.
It should be noted that couples whose divorce proceedings began on or after 1 July 1996 are able to chose either offsetting or earmarking. Furthermore, those couples whose proceedings began on or after 1 December 2000 can choose between offsetting, earmarking and sharing.
Although offsetting and earmarking continue to be used, the number of pension sharing orders is steadily increasing. However, it should be noted that pension sharing is not mandatory and in some cases is not suitable.
You should also be aware that when you reach your state pension age, in the case of your divorce, and your ex-husband reaches his state pension age or is already of state pension age you will be able to make a claim for a basic state pension on his NI contribution record for the period of your marriage if your own state pension is low and you have not since remarried.
Pension sharing also applies to your ex-spouse’s additional state pension, but not the basic state pension.
