Pensions and Divorce
Pensions and Divorce
Why are pensions an important asset in divorce proceedings?
Pensions are often a very important asset in divorce proceedings because the pension provision of one or both spouses may be the largest capital asset of the marriage after the former matrimonial home. In many cases, the husband might have a substantial pension provision and the wife might have none or a very limited pension provision because she has given up her job in order to look after the children. Such a wife is very likely to wish to be “compensated” for her lack of pension entitlement. There is no automatic entitlement to a spouse’s pension.
People often think that just because they have been married they are entitled to half of everything – including the pension. That is not the case. Pensions have a cash value – the “transfer value.” This is not however the same as ‘cash.’ The transfer value is the value the pension fund would have if it was transferred out of one scheme into another on a given date. For many people the simple solution of offsetting a pension against other assets was never satisfactory and different solutions are now available. It has to be said, also, that the courts have become increasingly pro wife in the matter of pensions and the example given previously would probably not be regarded as satisfactory. The Pensions Act 1995 gave the courts power to make what is called an “ear marking” order. If for example a husband has a pension provision with a transfer value of £100,000, under the Pensions Act 1995 the courts would have the power to ear mark a certain percentage of the future pension benefits for the benefit of the wife. This could apply to both any lump sum the husband might receive and also to the pension payments he would receive. The court also has power to force the husband to take a lump sum even if he does not want to do so.
In ‘ear marking’ cases the wife only receives any benefits when the husband takes his pension entitlement. If however the husband dies before taking his pension benefits, the wife would lose any benefit of an ear marking order. Also, it is possible to vary earmarking orders after they have been made and to that extent there is no ‘clean break’ between the parties as the husband is open to further claims by the wife if her circumstances changed. The Welfare Reform and Pensions Act 1999 was subsequently enacted and this Act gives the court power to make orders to split pensions so that both husband and wife have separate, independent pensions. There is however no requirement to split equally. It is done on the basis of percentages and the percentage to be transferred to a pension for the wife will depend on the circumstances of the case.
For example, if the wife has already received the bulk of the other assets of the marriage it would probably be wrong for her also to receive 50% of the husband’s pension. A lesser percentage might be appropriate although the exact percentage depends upon the individual circumstances of the case. In cases where a husband’s pension is split, the wife does not have to wait until her husband takes his pension benefits. She has her own independent pension provision and when she chooses to take those benefits is up to her. In addition, she does not lose her pension if her husband dies before her. As he pension is split as of a given date the relevant percentage of the fund’s value as of that date is transferred to the wife but she does not benefit from any further contributions paid into the pension fund by the husband from that date onwards. This enables the husband to rebuild his pension provision if he wishes. Since pension provision is often the second largest capital asset of the marriage after the former matrimonial home it is very often a very significant asset to consider in the divorce settlement.
There are different ways of dealing with pension and whether to ‘split’ or ‘earmark’ a pension depends on what the husband and wife want and on what is appropriate in any given case.