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    Protecting Pensions in Divorce

    Since 1st December 2000, when the Welfare Reform and Pensions Divorce Act 1999 was brought into force, a court has the power to make a pension sharing order in favour of one party to a marriage, in respect of the other parties pension benefits (fund) when the parties divorce.

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    Pensions can be as valuable as the equity in the parties’ family home – and sometimes significantly more valuable. It is important that all pensions benefits are taken into account when the marriage ends.

    It doesn’t matter whether the pension is:

    • a defined contribution scheme (the spouse contributes a monthly or annual figure into a pension ‘pot’),
    • a defined benefit scheme (becoming rarer these days), where the pension fund is a percentage of the earnings after a certain number of years worked or, more common now, a career average amount,
    • a fund contained within a SIPP (self-invested pension plan), or
    • an unfunded scheme such as the police or armed forces schemes.

    All pensions can be shared and are relevant.

    The starting point is to ascertain the value of the pension pot, which is, at least initially, done by looking at the Cash Equivalent (CE) value of each parties pension benefits. This is provided by the trustees of the particular pension fund. Some providers charge for this service, others don’t.

    CEs often look enormous but remember that the CE has to provide an income in retirement until death as well as, frequently, a tax free lump sum (often 25% of the CE).

    Pension sharing orders are reflected as a percentage of the fund which is being shared. That percentage is removed from the transferor’s pot and then his or her remaining fund continues to grow. The recipient (transferee) must usually select a fund into which their percentage share will be placed and that fund, also, will accumulate.

    Solicitors will often advise parties to seek the advice from a pensions on divorce expert (PODE) to advise on whether the CE figures reflects the true value of the pension pot and on how best the parties’ funds should be shared. This is not least because different types of funds perform in different ways; they also have different fees for implementing any orders that are made.

    As an alternative to losing a percentage of a pension fund, one party may wish to consider offsetting the value of his or her pension pot by giving their spouse more of the other assets (equity in the home, cash or savings). However, the calculation of what this off-setting figure should be is complex.

    Whatever the outcome, sharing or compensating by off-setting for unequal pension benefits, pensions are complex and anyone who gets divorced where they or their partner have pension benefits, and most now will, would be well advised to get expert advice from a family lawyer.

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    For legal advice on pensions on divorce

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