Although the number of divorces granted in the UK has been falling, to just under 150,000 in 2006 (Source: National Office of Statistics 2007), divorces still affect well over 1/4 million adults every year and their pension prospects. With pensions being most people’s second biggest asset, a major consideration is always going to be pension benefits. Here is an overview of legislation and current practice:

1. Previous Legislation
Whilst the consideration of pension benefits within divorce settlements was an issue in the 1969 study by the Law Commission, the key legislation has been:

Matrimonial Clauses Act 1973 - Ss 23-25 deal with the provision of a “clean break” wherever possible
Pensions Act 1995 (PA) - The PA requires courts to take pension rights into account when assessing assets on divorce
Welfare Reform and Pensions Act 1999 - brought in the option of Pension Sharing on Divorce from December 2000 to attempt a “clean break” settlement for pension funds

2. Offsetting

The pension funds are valued, and the spouse with the greater benefits provides the other spouse with additional funds elsewhere in the settlement to compensate them for the loss in pension rights
Unfortunately, many people do not have sufficient assets to enable offsetting to be applied

3. Earmarking

Came into effect in 1996
“Earmarking” applies to all private pensions (including those in payment), but not state benefits
Entails the court issuing an attachment order to the pension scheme which requires the trustees of the pension scheme to pay a proportion of the member’s benefits directly to the ex-spouse when the benefits are taken
The court can also earmark a proportion of the member’s death in service lump sum and widow(er)’s pension benefits for the protection of their ex spouse
If the petitioner remarries, the earmarking lapses. If there is the likelihood that the petitioner will remarry prior to the respondent’s retirement age, then except for some safeguard on the life cover side, this procedure is probably a costly waste of time
Earmarked benefits are all taxed at the highest rate of the pensioner, irrespective of the tax rate for the ex spouse

4. Pension Sharing

Introduced in December 2000
Pension sharing applies to all pensions excluding the state basic old age pension
All pension benefits are valued (see CETV below) and the petitioner with the lower funds is then granted a share of the member’s benefits so as to equalise pension provision at the date of divorce
The share can be granted by way of a transfer to the petitioner’s own scheme or the petitioner may become a “paid up” member of the respondent’s company pension scheme
The biggest problem with pension sharing is the cost. As many divorces are Legal Aid based, often there will not be money available to pay for good advice

5. Cash Equivalent Transfer Value (CETV)

The CETV is the prescribed basis for valuing the pension benefits held by a divorcing member
This value can either be used to calculate an offset against other assets of the marriage, or as a measure to divide the pension between the member and the former spouse
For the purposes of this legislation the date of valuation will be the divorce date
In many cases, the CETV is unfair to the petitioner as it is the minimum valuation of the member’s fund

6. Summary
We expect pension sharing to be used in the vast majority of divorce cases where offsetting is not an option. Cost will, however, remain an issue and any transfers will have to be sufficient to warrant the large costs involved in calculating and organising the new arrangements.

These notes ("Pensions and Divorce") are intended to provide a general appreciation of the topic and it is not advice. Guidance should be sought from a specialist like ourselves who is qualified to advise in your specific circumstances.

For more information on Personal Pensions, please contact Cheltenham Independent Financial Advisers Limited on 01242 269656 or email us at info@cheltenhamifa.co.uk. One of our advisers will be happy to assist you.