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PENSIONS
For the family solicitor pensions are the most technically demanding change that has occurred in recent years. I would ask you to read this through carefully, since very few people understand their pension(s). The legal position is also rather complex.
Until about 10-15 years ago, extraordinary as it may now seen, the Courts took little notice of pensions. This generally favoured husbands.
Over the succeeding period there have been progressive changes. As is often the case with English law the position is not entirely clearcut. However, generally speaking, unless it is an exceptionally short marriage or there has been a significant period of cohabitation prior to the marriage, the Court aims at equality of pension entitlement accrued during the marriage.
That is easy to say but more easily explained by an example. A pension generally has a capital value referred to as the cash equivalent transfer value (cetv). If for example
(a) a couple have been married for ten years
(b) the husband has been receiving a company pension for twenty years and the pension has a cetv of £200,000
(c) the wife has a company pension for five years worth £20,000, all of which was accrued during the marriage.
Then H's pension referable to the marriage would be £100,000 and W's £20,000. The total would be £120,000. In order to have equality the wife would require £40,000 of the husband's pension, or 20%.
Ways of dealing with pensions
It can be quite expensive to divide a pension. There may be reasons why a pension is more attractive for one spouse than another. There are three ways of dealing with pensions:
(a) pension sharing (also referred to as pension splitting)
(b) pension attachment
(c) offsetting
The example used above is one of pension sharing. The wife would actually receive 20% of her husband's pension entitlement.
Pension attachment is relatively rare. I will deal in more detail with each below.
Offsetting is giving one spouse (usually the wife) a lump sum in consideration of her giving up any right to the other's pension.
Pension Sharing
The Court cannot make a pension sharing order unless it is part of a final financial order within divorce proceedings. One cannot have an informal arrangement to pension share. When a pension sharing order is made then the pension provider is required to give to the other party (usually the wife) a sum in accordance with the order. I am simplifying somewhat. The wife then has the option of keeping that share within the pension scheme (opting in) or taking it out and purchasing her own pension in the marketplace. She cannot encash the entitlement but must wait until her share of the pension becomes legally payable to her. Solicitors are not allowed (generally speaking) to advise on which course is preferable.
An independent financial adviser (IFA) will need to be consulted. The wife will have acquired a theoretical lump sum to invest in a pension. However, she cannot take the pension until she complies with the rules, as is it were her own pension (which it is). Let us say that the husband is 64. The wife is 42. The husband will be entitled to his pension on his 65th birthday (for example, and usually the case for occupational pension schemes). However, the wife will have to wait for her pension in accordance with the pension rules. Usually this would be 50 if she had invested in a personal pension plan or 60 if it were a normal occupational scheme.
Pension attachment
For technical reasons, this is a very strange hybrid. It was introduced before pension splitting/sharing and is generally considered rare and unacceptable. It does however have advantages where there is a significant age difference between the couple or where the occupation means that the husband is entitled to his pension at a very early date. Examples of this are the Armed Forces, mental health nurses, and football players. They are all entitled to early pensions.
Do not bother to read the rest of this section unless you think it may apply. It is complicated.
A pension will usually consist of a lump sum (usually but not always 25% of the capital value of the pension . It will also provide for an income pension.
The main point here is that the wife is entitled to her husband's pension as soon as he receives it. The sting in the tail (and it is a big sting) is that the income element of the pension will come to an end on the husband's death or upon the wife's remarriage.
Suffice to say that there are cases where this type of order may be appropriate. But it is relatively rare and would require careful consideration.
Offsetting
One feature of English law (as opposed to the Continent) is that it is a mixture of statute based law and case law. It is not always logical and is often uncertain.
Let us suppose that one has a husband of 44 married to a wife of 32. His pension entitlement will start at 65. The wife will not therefore be entitled to a pension share, if she opts in, for a very long time. It depends on the pension rules. If, as expected, the rules will also require a retirement age for women of 65 she will have to wait another 33 years before she receives her entitlement. It is often at a time when she is strapped for capital. She may well be prepared to give up any rights to her husband's pension in exchange for money now.
On the other hand, the husband will himself have to wait for 21 years. The pension is not very attractive at the moment, tying up money which the husband will also need. Therefore in the negotiations the capital value of the pension is discounted, to take into account the unattractiveness of capital (which is sorely needed now) being tied up in a pension. Although there is no hard and fast rule I tend to argue for the husband a discount of 2% per annum until the date of retirement.
Let us say that the pension has a cetv of £100,000. The husband has 21 years to go until he can receive his pension. The value of the pension for the purpose of offsetting would be reduced by 21 years x 2% or 42%. The wife would therefore be entitled to an offset of capital of £100,000 (100%-42%) or £58,000.
Types of pension
I would emphasise that I am not an expert in this field. The small print of pensions, particularly occupational pensions, needs to be considered carefully.
First there is the state pension which Courts tend to ignore. Its effects can however be complex and need to be taken into account.
Secondly there are private pension plans. These were pensions taken out by the self employed but are now universally available. They are usually connected to the stock market and can be highly volatile. If the husband has invested in this sort of pension then the wife would probably be strongly advised to shop around to see whether there is a better pension fund in which to invest.
There are generally two sorts of pension, the PPP (private pension plan) and s226 policies. The PPP is more modern and can be taken at any time between the ages of 50 and 75. However for older couples there may well be s226 policies (also called retirement annuity contracts) which can be taken between 60-75. One can convert these but once again the law is complex.
There are then occupational pension schemes. Each scheme is different and requires careful consideration (that is my job). They often have complicated provisions relating to the entitlement of ex spouses and dependents.
However, these generally divide into two sorts of schemes. The first is the final salary scheme. It is the most generous. One has to take care with these as often for technical reasons the cetv is undervalued. An actuary may need to be instructed to obtain the true value of the pensions. The next is a money purchase or company PPP scheme. Most companies now are realising what a bonanza they gave to their older employees in final salary schemes and are switching to money purchase schemes. This is a complicated area and I will explain it to you if necessary.
Opt in or Opt Out
When you receive a share of the other spouse's pension you have to decide whether to stay within the scheme or take the money out and invest it in your own pension.
This really is an incredibly complicated area. We solicitors are not qualified to advise you here. You will be advised to consult an IFA.
There are certain pensions which require you to opt in. An example would be the pension of a civil servant. This is funded by the taxpayer. There is no pension fund as such. This pension scheme does not have the capital to allow you to leave. You must opt in.
Conversely, there are company schemes which have capital reserves. They have calculated the pensions on the basis (usually) of actuarial calculations based on husband retiring at such and such an age and wife probably living longer and receiving a widow's pension. Opting in would upset that actuarial calculation. They there require an opt out. Often the pension fund will deliberately undervalue the cetv and once again one may require expert actuarial advice.
For PPP's or s.226 policies, these are usually unit linked policies. The insurance companies will have experts who have invested the money. Some of these policies will have performed far better than others. Should one keep the money in that particular policy or invest it in another. Once again it is complicated and the advice of an IFA is required.
I hope I have not blinded you with science. Even we solicitors tend to glaze over here. This is very much a simplified explanation and every case needs to be considered in detail.
It is now frequently the case that the pensions are worth more than the equity in the house. It is an aspect of the financial aspects of divorce which requires great care. It is also expensive. But finding the best formula is of vital importance in the long term.
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