CHAPTER ONE – INTRODUCTION
The Welfare Reforms and Pensions Act 1999 introduced Pension Sharing Orders for proceedings issued after1 December 2000. For the first time, this enabled the court to take a percentage of a spouse’s pension (the member spouse) and transfer it out of their name and into the name of the other spouse (the non-member spouse). This facilitated a pension asset to be shared on divorce in a way that had not been possible previously, reducing the pension pot of the member spouse and giving the non-member spouse a pension credit in their own name independent of the member spouse’s. in certain circumstances this can be invested in an entirely independent pension, or in the case of some defined benefit pension schemes, a new pension pot in the non-member’s spouse’s name.
It is not uncommon for a client to make contact and enquire about splitting a pension on separation, without divorcing. This is more common in those cases that are amicable or where they are in less of a rush to formally divorce and are instead looking at a separation agreement, especially whilst we remain in an era of fault-based divorce and/or the necessary period of separation has not been reached. It is only on divorce that the court can make a pension sharing order, and not on the back of a separation agreement, as is often misunderstood by clients. In cases where the parties do not wish to divorce, for religious reasons for example, then the issue of income provision in retirement may need to be dealt with by way of maintenance instead, embodied in the appropriate legal agreement such as a separation agreement.
The issue that has since arisen is, how do we as practitioners treat pensions in a financial remedy cases? For many practitioners, it was drummed into us at university and beyond that we have to be exceptionally careful that we are not giving financial advice. The consequence for doing so is not only negligent, but potentially criminal as providing financial advice and not being regulated by the FCA is a criminal offence. This leave us trying to dance a fine line between advising a client on their pensions in the context of a divorce, without going over that line and into the remit of giving advice that only a regulated financial advisor should be providing. Practitioners should always have this at the forefront of their mind when advising on pension on divorce as clients often find information online that we know to be incorrect but are not permitted to tell them for fear of giving financial advice.
The first point that must be made is this: always signpost you client to a financial advisor. If they choose to ignore that advice then that is a matter for them, but as a practitioner in an increasingly litigious world, we should ensure that our clients have been given that recommendation, especially when it comes to what do with a pension credit.
Pensions are not an easy topic to understand. Many practitioners find that they are rarely mentioned in legal education until you reach the point of qualification, at which point there is a steep learning curve before advising clients. For more experienced practitioners, the law is continuously evolving and complacency could result in a negligence claim. The terminology is sometimes alien and complex, what it means in practice even more so. The pensions freedoms brought in by the Pension Schemes Act 2015 recently do not help make this area easier, as people now have the ability to take a significant portion of their pension as a cash lump sum, removing it completely from the pension pot and available to spend as they please. This of course has its consequences; the tax liability can be steep for those who takes more than 25% of their pension will find a tax liability arising on anything taken over the first 25% of the money. Beware of this, some client’s may think that removing money from their pension to pay their former spouse a lump sum is a potential solution to proceedings, however it could have significant tax consequences that the client has not foreseen. Ensure that a financial advisor provides the correct advice on this before committing any proposals like this to paper.
It is intended that this book will serve as a practical guide to family practitioners who are finding themselves dealing with the evolving world of pensions on divorce. It will give you a steer as to what information to obtain from your client, how to complete the Form E, and how the court will subsequently deal with that pension asset.
Of course, it would be impossible to write about pensions on divorce without referencing the Pension Advisory Group’s report on the treatment of Pensions on divorce. All layers who are involved in the financial remedy proceedings should read this report cover to cover and look on it as a bible for family practitioners when it comes to pensions, especially in light of the judicial nod it received by HHJ Hess in W v H in 2020. The PAG report will be referenced through this book, and this book should be read in conjunction with that report and the recommendations within it. That cross-profession publication contains a wealth of information and guidance for practitioners.
Pensions are generally separated into 2 types – defined benefit and defined contribution pensions.
Defined contribution pensions have a variety of names, including money purchase pensions, stakeholder pensions or personal pensions. These types of pensions are valued based on the money that has been paid into the pot and the fund value is often sufficient to provide the necessary information for a Form E and thereafter a PODE instruction. The money in the pension is invested by the pension provider until retirement.
Defined benefit pensions are usually pensions from an employer based on a pension members’ salary. These also go by the name of final salary pensions or career average earnings, depending on the type. These pensions are less common in the private sector now than they once were, but nevertheless they are still out there and crop up in divorce cases, especially with older parties. The most common scenarios where these pensions are a still feature are cases involving clients employed by the NHS and uniformed services such as the MOD, Police and Fire Service. In the circumstances where a party is employed by the public sector, this should immediately alert a practitioner to the likely issue of pensions, and the need for expert input.
Pensions are often an asset that is ignored by parties. It is extremely common for a party to instruct a solicitor and say that they “aren’t interested in pensions, we keep our own”, or “we’ve agreed not to touch each other’s pensions”. This is a mistake and one that should be corrected at an early opportunity. Pensions are a valuable asset, and it is imperative that they are properly considered. Many clients will choose to focus on the immediate cash assets without appreciating the importance of also looking at future pension income. In an age of “silver separators” it is especially important to ensure that the financially weaker party is protected in their later years as those cases often feature scenarios whereby a career, and thereby pension accrual, has been sacrificed in favour of the other party’s for whatever reason, be that to maintain the home or to bring up the children. That loss of pension contribution is a factor that should be considered on divorce. The court made clear some years ago that a homemaker’s contribution was just as equal as any bread winner’s contribution, but that will extend to pensions also. A further common scenario that we are all likely to have heard is the focus on the house, with one party wanting to keep the house in lieu of a claim against the other’s pension. This is a false economy and not something that should be considered without proper advice and guidance from both a PODE for the offsetting calculation and a financial advisor to consider future income and expenditure. This is the old adage of comparing apples and pears, 2 different types of asset that are being spoken of as if they are equals. Remember, a pound in a pension is not the same as a pound in your pocket. Further, the party retaining the house has to maintain and run it in the future. If they experience a sudden drop in their income when they retire, that may not be possible. A pension sharing order may help remedy this.
It would be wrong to assume that only high value cases will involve complicated pension assets. On the contrary, it is often the low to mid-value cases that require complex analysis of these difficult assets. Take a nurse, for example, who has worked 20 years for the NHS. There may be a house with a reasonable sum of equity, limited savings, but a significant defined benefit pension scheme. That pension scheme is going to feature as an important factor in a case and will add to the time and cost to the client of resolving the financial aspects of the divorce. There is a much greater awareness of this than there once was, but many people find the issue of pension particularly difficult to comprehend as they very much see it as their own.