The intricate and distinctive nature of pensions in financial remedy proceedings can be challenging to navigate. This blog will consider the various options available to spouses when it comes to separating pensions and key aspects we consider when addressing their division.
Court Powers
An application for pension provision is submitted via a Form A under the Family Procedure Rules 2010, typically alongside an application for other types of financial order (including, lump sum provision, property orders and maintenance). The courts have three key powers in respect of pensions:
- A pension sharing order.
This entails splitting an existing pension fund, not necessarily equally, and passing a proportion to the other party to either establish an independent pension or to add to their existing pension pot.
- Pension attachment order.
The court has the power to order that a person receiving a pension must pay a proportion of that pension to their former partner. This is a less common arrangement because it does not provide for a clean break between the parties.
- Pension Offsetting
This means that the court looks at the transfer value otherwise known as the ‘cash equivalent’ value of the pensions and decides that the person without significant pensions should receive a balancing payment in liquid capital from some other source, e.g. the family home or savings, rather than from a pension.
This is usually only possible where there is spare capital available after rehousing both spouses.
Dividing Pensions
In July 2019, the Pension Advisory Group (PAG) published guidance on the treatment of pensions on divorce. That guidance was updated in December 2023. The report considered a number of important issues, for example:
- The limitations in the use of Cash Equivalent Values (CEVs)
CEVs represent the figure that a pension provider might offer in return for an individual relinquishing all future entitlements to a pension scheme. The methodology behind calculating CEVs can vary considerably based on the particular pension scheme. A Pensions on Divorce Expert (PODE) can be used to identify potential issues that may arise and provide guidance on how to achieve a fair valuation and division.
- Whether pensions should be divided based on capital value or income
The PAG report emphasised the need for the court to seek a fair outcome. Thereafter, In W v H [2020] EWFC B10, the court discussed whether pensions should be divided based on capital value or income. The preference found was for trying to ensure that spouses have equal pension income upon retirement in cases focusing on the parties’ needs, especially in cases with sizable pensions and where the parties are nearing retirement. Conversely, an equal division of pension capital might be more appropriate for smaller Cash Equivalent Values in younger parties. In order to calculate the pension share required to obtain equality of income, it will often require expert input from a PODE.
- Ringfencing Pensions acquired outside the period of marriage
In sharing cases, pensions that are accrued outside of the period of marriage may be excluded from the matrimonial pot (ringfenced). However, in cases focusing on meeting the parties’ needs, the practice of ring-fencing pensions accrued outside the marriage might not be suitable. The PAG report emphasised that in needs-based cases the timing and source of the pension saving is not necessarily relevant. The focus of the court is to ensure that both the parties needs are appropriately met. The case of KM v CV [2020] EWFC B22 further supported this, as the court held that wife’s pension accrued post separation should be shared in order to achieve equality of income in retirement.
Pensions can be complex and so it is crucial to approach them thoughtfully when addressing the financial aspects of separation. Each case is unique and requires personalised advice tailored to its specific circumstances. If you would like to receive further advice about the issues considered in this blog or other finanical settlement concerns, please do not hesitate to contact one of our expert family lawyers.
