Amy Radnor spells out the pensions issues arising from divorce

Although the process for divorce is well established, the division of assets can be complex and difficult, and in particular the ancillary relief process to divide assets and pensions on divorce can be stressful and time-consuming - and divorce can create financial difficulties! The pensions of both parties in a divorce will be considered when the court decides what money goes where. If one spouse never worked for instance, while the other built up a large pension fund, this will have to be taken into account. The calculations can be complex.

Of the three powers of capital distribution which are available to courts on divorce, most couples are familiar with the first two, namely Property Adjustment Orders, which allow the court to order the transfer of a house or land from one party to another and Lump Sum Orders, which order one party to pay the other a sum of money. The final power, the power to make a Pension Sharing Order, is less well known and understood, despite the fact that for some couples a pension may be the most valuable asset after the family home and its fair division crucial in ensuring both parties have an adequate income in retirement.

A court has the power to make a Pension Sharing Order, or PSO, on any divorce in England and Wales where there is an applicable pension, although it is important to note that they cannot be made in relation to pensions located outside the UK, nor can they be made in relation to the basic state pension. It is important also to be aware that pension sharing is not available on judicial separation but only on a final decree of divorce, and one of the crucial disincentives of the judicial separation route is the court's inability to order a pension share.

In terms of the practical procedure, the total transfer value of the pension fund which is going to be "shared" will be determined and the court will then order a percentage division. The receiving spouse is then "credited" with those pension rights which become entirely theirs. Depending on the scheme, they may be able to keep their new pension fund in the same scheme as their ex-spouse, or transfer it out to a separate pension fund of their choice. An attractive feature of the pension sharing system is that there is a clean break at this stage between the two pension funds. The ex-spouse does not receive the benefit of future pension contributions made by the member spouse or their employer (in the case of an occupational pension), but they are in control of their own pension fund which they are able to manage entirely as they wish (subject of course to the rules of whichever pension scheme they select).

It is not possible to take a pension credit as cash. If an external transfer is requested, the original pension fund will require confirmation from the new fund that they are instructed to accept the credit and the payment will be made directly between them without passing out to the ex-spouse. It is possible to order a 100% pension share, which is in fact the wholesale transfer of a pension fund from one spouse to another. Pension sharing orders can be made over pensions which are already in payment.

Where a PSO cannot be made for whatever reason (for instance on a petition for judicial separation rather than divorce) the court has power to make a Pension Attachment Order. This is entirely different to a PSO and in fact is a species of maintenance or lump sum payment although one which relates to pensions only. Rather than a separate pension credit from the main pension for the benefit of the receiving spouse, a Pension Attachment Order requires the trustees or managers of a particular pension scheme to pay a certain percentage of the member spouse's pension to their ex-spouse each year or each month or a certain percentage of their commutation lump sum, if and when they do take benefits on retirement. The key difference here is that the right to
that maintenance, or retirement lump sum, dies with the member spouse and the ex-spouse does not acquire their own pension rights which become theirs, independent of the member spouse, in the same way as they would under a PSO. For these reasons, Pension Attachment Orders are rare and generally a PSO will be the preferred option. Pension Attachment Orders can be used to attach death benefit lump sums. The court does have power to make a Pension Attachment Order in divorce cases but a PSO is almost always preferable and rights in the same pension arrangement cannot be both attached and shared in the same set of proceedings.

The exact terms of the percentage division on a PSO will be the subject of negotiation and depend very much on the circumstances of each case. Although pensions provide maintenance in later life, in long marriages with children they are frequently regarded by the court as another capital fund akin to the family home or other investments and the presumption is that there should be a 50/50 division. In the case of valuable pensions, the receiving party will generally wish to obtain a pension report from an actuary to determine exactly what share of the pension will be required to produce the same income for them in retirement as their former spouse, given that women have a longer life expectancy and therefore have different annuity rates. This is particularly the case also where one party has health considerations which need to be factored in.

The exact division is negotiated by practitioners in the context of the division of the other assets. For instance, one party who wishes to retain the whole of a particular pension may be prepared to pay a greater lump sum to their spouse in recognition of that. This is a practice known as "off-setting" which is not a separate power open to the court but rather an exercise performed in negotiations. Where there is an overseas pension for instance, and the court cannot order a PSO, the only option is to off-set with other assets to compensate the ex-spouse.

It is generally accepted that cash paid in lieu of pension is more "valuable" than a pension credit which is locked in and not going to be available to a spouse for many years to come and which carried the risk that the receiving spouse may die before becoming eligible for pension benefits and therefore get no enjoyment at all from the money. It is a broad rule of thumb that cash in lieu of pension is generally discounted by about one third, to reflect the greater value to the recipient of free cash.

English courts cannot make a PSO in relation to overseas pensions, though the same result can be achieved in exceptional circumstances by agreement between the parties, if the trustees of the overseas pension scheme are prepared to co-operate.

In England, PSO's are not usually "free-standing" and are only made in the context of financial proceedings in the UK, although it is possible in some circumstances to apply for a PSO in the UK following a foreign divorce, provided that the pension scheme in question is here. This is not always the case in Europe, and in Germany a German couple with a German pension whose financial settlement had been dealt with in the UK, could then apply to the German court for a free-standing German PSO.

It is important to note that European pensions can differ substantially from UK pensions in other ways and are often "pots" of capital which are available to members on retirement with varying tax consequences.

Written by Amy Radnor, solicitor at Charles Russell

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