In any divorce settlement or on the breakup of any civil partnership pension assets must be taken into account. And for many people their pension is one of the largest assets they have.
There are 3 different ways this can be done:
Offsetting – the value of the pension is ‘offset’ against the value of other assets.
Earmarking – all or part of the pension is ‘earmarked’ to be paid to the ex-spouse.
Sharing – a ‘share’ of the pension is given to the ex-spouse/civil partner.
This probably provides the cleanest break between all parties, as assets of the same or similar value are allocated to you or your partner and pension funds or entitlement remains with each other. This option is particularly useful when there are overseas pension assets, as these cannot be shared via a UK court order.
If you choose pension offsetting on your divorce all of your assets and ex-spouse or partners assets are taken into account. Each partner retains their pension assets, but these are offset against other assets. For example if one person has a larger pension pot the other could receive a joint asset of similar value, e.g. a house.
This is where using offsetting can be difficult because when there are large value assets involved, such as pensions and property, the ability to split assets fairly can be challenging and sometimes impossible.
Pension earmarking is now only available in Scotland. In England, Wales and Northern Ireland it has been replaced with ‘pension attachment orders’. A pension attachment order redirects part or all of someone’s pension benefits to the ex-spouse or partner when it becomes payable. This means an ongoing link will continue between the two parties and isn’t as clear cut as Offsetting.
Once again, on your divorce all assets will be taken into account if you opt for earmarking. The Court instructs part or all of the pension benefits to be paid out to an ex-spouse or partner from the pension provider when they retire. However the ownership and control of the pension remains with the member, and therefore they decide when the benefits come into payment (subject to scheme rules).
Taxable income payments from the pension still ‘belong’ to the partner who owns the policy. The pension income will therefore still be taxed and paid by that member, not the ex-spouse or partner receiving the money.
Pension sharing, like offsetting, is aimed to provide a clean break between parties by splitting the pension assets immediately and letting each person decide what to do with their share independently.
If you opt for pension sharing the Court will issue a pension sharing order (PSO) and this states how much of a pension, an ex-spouse or partner is entitled to receive.
The amount due to an ex-spouse or partner will be in percentage terms of any pension transfer values that are to be split. Similarly, the pension sharing order may set out how much the opposite partner will receive from their pension too. All transfer values are worked out the day before the pension sharing order comes into effect.
The pension awarded to either partner is called a pension credit and can be transferred to an existing or new pension scheme. Providing they will accept the transfer, and is likely you would need a financial adviser to arrange it.
Understanding the value of a pension is not purely down to the current or transfer value. A pension scheme that offers guaranteed benefits with annual increases is more valuable than one that is dependent on investment returns and annuity rates available at the time of retirement.
If you find yourself in the position of separating/divorcing make sure you take financial advice to safeguard yourself. You only get one opportunity with your financial settlement make sure you get the best deal.
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