Beyond the Grave: Pensions on Divorce or Separation
Most people, and even many lawyers, are not aware of the claims they may have on their partner’s pension when they die. Pensions law is one of the most complex areas of law, and estimating the value of pension benefits requires a very complex set of assumptions and calculations, and experts are often needed to properly assess their value.
These claims are usually lost when a marriage ends in divorce, so spouses considering financial provision need to make sure they get the right advice before agreeing any settlement. Many spouses, usually but not exclusively women, forgo the opportunity to make national insurance contributions or to contribute to a private or occupational pension, in order to support their spouse or bring up children. Ensuring that any financial settlement makes proper provision for their financial needs in old age is therefore very important.
This article cannot cover all the complexities of pensions arrangements on divorce, and you should seek proper legal and financial advice before agreeing any financial settlement with your spouse.
1. I’m not married – do I have any claims on my partner’s pension?
There is a persistent myth that unmarried partners (usually referred to as ‘cohabitees’ by lawyers) have a “common law marriage” and are therefore entitled to the same benefits as legally married persons. This is not true (except in Scotland) – in almost all areas, the law treats cohabitees as if they were not married and they are not entitled to any protection.
However, some occupational pension schemes, particularly in the public sector, do provide ‘survivor benefits’ to cohabitees in a long-term, stable relationships – but protection is not automatic (it will depend on the particular rules of the pension scheme) and some partners have had to go to court to establish their right to claim their deceased partner’s pension.
More importantly, any rights you do have will only apply in the event of your partner’s death. You will not be entitled to anything from your partner’s pension if you separate, unless you have both entered into a separation agreement that provides for this.
2. I am married and considering divorce – what do I need to know about pensions?
It is common knowledge that when married couples and civil partners split up, the court has the power to award a lump sum or annual payments for maintenance. They will consider the income and financial assets of the parties, and pensions are considered a financial asset, so they will be taken into account and part of one spouse’s pension may be awarded to the other.
All types of pension are considered – whether it is a private scheme or one through your employer, final-salary or defined-contribution, even certain kinds of state pension benefit are considered (for more on this see below). You’ll need to provide your spouse and the court with details of any pension you are entitled to.
When applying for maintenance, going for mediation or reaching a settlement with your spouse, you will be asked to complete a financial statement (usually called a ‘Form E’) listing all your assets and their value, including your pensions.
It can be complex working out exactly which pensions you have and what benefits they entitle you to, particularly if you’ve had a number of different jobs. Before going to mediation or to court, you should talk to a financial advisor to understand what pensions you have and what you’re entitled to – not all pensions are created equal and the rules of each scheme can make a big difference when thinking about how to divide pension benefits.
Valuing certain kinds of scheme can also be tricky, particularly final salary schemes. If you or your spouse have valuable pensions or are entitled to final salary pensions, an expert valuation may be very helpful.
It is very important to get legal and financial advice at an early stage when discussing finances – it helps to reach agreement quickly and avoids costly mistakes and delays.
3. My spouse and I don’t have private pensions – should I still be thinking about pensions in our financial settlement?
Yes, state pension benefits can still be affected by marriage and divorce.
Basic State Pension
As noted above, some spouses will have forgone work in order to help bring up children or support their partner’s career or business. This will have had an impact on the number of years of qualifying National Insurance contributions they have built up and so they may not qualify for the full state pension, receiving instead a lower pro-rata payment.
People who reached state pension age before the 6th of April 2016 could use their spouse’s NI contribution record to boost their state pension income – this is not affected by death or divorce, but you would lose this right if you remarried. This is something that you would need to consider when thinking about any financial settlement on divorce.
Additional State Pension
Many people are entitled to receive an additional earnings-related pension benefit from the government, originally known as SERPS and then as the Second State Pension. You will receive these benefits if you met the contribution requirements and reached state pension age on 6th of April 2016.
The government moved to a ‘flat pension’ system after the 6th of April 2016 and these separate payments were ended, but some people who reach retirement after this age will still get a higher state pension payment, to take account of the extra National Insurance payments they made under old system. This is known as a “protected payment”.
Both protected payments and SERPS/Second State Pension can be inherited when one spouse dies. They are also considered a financial asset and will be taken into account by the court in awarding any financial settlement – meaning it should be disclosed by you or your spouse when discussing finances. To apply for a valuation of your pension from the Department of Work and Pensions, use this form, or to get a forecast of your state pension, use this form.
If you and your spouse agree, or if the court thinks it is appropriate, a ‘pension-sharing order’ can be made by the court which will transfer some of the value of one spouse’s pension to the other. More information on how these work is given in section 5 below.
4. How much of my spouse’s pension am I entitled to?
An estimate of exactly what is fair will of course depend on your specific circumstances, but the law and the courts have some general yardsticks which they will use to decide how to split the parties’ pension entitlement. You may not be intending to go to court, but it is a very good idea to get advice from a solicitor on what you would get if you were to go to court, so that you and your spouse know you’re making a fair agreement.
Firstly, in the case of a short marriage or one where the parties are many decades from retirement, the court might well decide to leave each spouses’ pension alone – particularly where the parties are young, the court may well take the view that they have plenty of time to save for retirement.
In other cases, the court will first consider:
- Whether there are sufficient assets to meet each person’s needs;
- If needs are met, the court will consider how to split assets “fairly”.
The vast majority of cases (even where total assets are above £1 million) will be “needs-based”, as large amounts of money are needed to provide a reasonable income in retirement (most people will be claiming a pension for 20 years or more!). In a needs-based case, the court will try to ensure maximum income in retirement for both parties.
When considering how to divide up pensions on divorce, many people rely on “cash equivalent value” or CEV to calculate how much to transfer to their spouse – this is a figure that represents how much would need to be paid to buy out the pension benefits that you have already accrued, and is often shown on your pension statement.
The latest guidance from the Pension Advisory Group suggests that this is the wrong approach. In most cases you should get an expert adviser to calculate the actual income you could expect in retirement – different approaches to dividing pensions will often produce unexpected effects that won’t be known without expert guidance.
Unfortunately, the answer to the question of “how much?” is “it depends!” – seeking expert advice is always the best strategy.
5. How does it work? Lump-sums, periodical payments and “offsetting”
Once it has been decided that one spouse should be given support by the other, one of the key questions is whether to award a spouse a “lump sum” or “periodical payments”. Essentially this means either that person should get one big payment or a series of smaller payments over time.
Courts usually prefer lump sums in financial proceedings – the aim on divorce is often for a “clean break”, where the parties can settle what they owe to each other in one go, rather than continuing to be financially tied to one another.
But when it comes to pensions this can be difficult to achieve – cashing in a pension has a number of tax and financial implications for the future, so it is often better to award payments out of a pension following retirement.
Whatever you decide to agree, you will need a solicitor to draft it. Unlike other assets, pensions cannot simply be transferred into someone else’s name; an agreement to share a pension needs to be formalised via either:
- A “pension-sharing order” (this transfers money from one spouse’s pension scheme to the other’s); or
- A “pension attachment order” (this gives a person the right to be paid out of their spouse’s pension scheme when they retire).
These must be drafted correctly and sent to the pension scheme at the right time – otherwise they will not take effect and you might lose the right to take a share of your spouse’s pension.
Pension Offsetting
To avoid these complications, or because a spouse would prefer to have cash in hand rather than money locked in a pension scheme, some people opt for “offsetting”. This is simpler than it sounds – in effect, in exchange for not claiming on their spouse’s pension, the other spouse is given a larger share of the assets of the marriage (e.g a bigger share of the family home).
This method has the benefit of simplicity – but it carries big risks. Trying to work out what a share of a pension is worth in today’s money is something only an expert valuer can do, and taking cash now will likely leave you without much support in retirement. Approach with caution!
Summary
If your head is swimming if you read all of the above – you are not alone! Pensions are complicated enough on their own without divorce being thrown into the mix. It will rarely be appropriate to agree anything on pensions without the assistance of both legal and financial advice.
If you are older and considering divorce, please ensure you take the right steps to protect yourself financially. The courts have an obligation to see that you are protected as well as you can be – make sure you ensure you don’t lose that protection!
