CHAPTER ONE – INTRODUCTION
Pensions are a daunting asset for many financial remedy practitioners. They are complex, often unknown and often create a feeling of anxiety that advising on them could cross that line between legal advice and financial advice. It is also an area that is not well understood by many, and not an area that those at the early stages of their career are often taught on their journey to qualification. Even those with many years’ experience and their own pension provision find the asset a confusing one to deal with.
Historically, many pensions were linked to a pension member’s salary (final salary/defined benefit schemes). These schemes for those in the private sector are few and far between now, largely owing to the cost of maintaining such an expensive pension scheme. The result is that fewer of us are involved in those schemes, or understand their rules, calculations or the benefits that they provide.
For many, their pensions are in defined contribution/money purchase schemes. That is what most people are familiar with; they have a pot of money invested on their behalf, waiting patiently for retirement. With those pensions, what you see is what you get in many respects when it comes to their value.
When it came to divorce, until 1995, with the introduction of pension attachment order (also known as “earmarking orders”), your pension truly was your own on divorce. A pension-member spouse may have had a maintenance obligation, indirectly reducing their available pension income, or an order obligating the pension trustees to pay a percentage of the pension to the non-member spouse. A pension was secure, untouchable, and always in the name of the member-spouse until their death. However as with many aspects of family law, times have changed, and the law has evolved to cater for changing attitudes. The law was not fit for purpose and reform was required to avoid the non-member spouse losing out on pension benefits and an income on divorce, or in the case of attachment order, on the death of the member-spouse. After all, after a 30-year marriage, why should the recipient lose their retirement income because of the member-spouse’s death post-divorce? That was the risk and reality for many prior to the introduction of Pension Sharing Orders.
The Welfare Reforms and Pensions Act 1999 introduced Pension Sharing Orders for proceedings issued after 1 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 product, or in the case of some defined benefit pension schemes, such as the armed forces, a new pension pot in the non-member’s spouse’s name within the same scheme.
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. It is also a feature of religious separations where the parties do not wish to formally divorce and instead opt for a judicial separation. Many unmarried couples will also experience an initial level of anxiety at the prospect of losing their pension, a common misconception that ties into the myth of “common law spouse”. 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.
It is also important to note that on a judicial separation application, the court cannot make a pension sharing order. in those instances, an ongoing periodical payments order may be necessary.
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 regulated financial advice. The consequence for doing so is not only negligent, but potentially criminal as providing regulated financial advice and not being regulated by the FCA is a criminal offence. This leave practitioners dancing 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. As practitioners 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. Ideally, the involvement of a financial advisor in the matter at an early stage is sensible way ahead, especially those with larger pensions where the income exceeds their needs, or their pension income pushed them into a higher tax bracket and sharing of a pension can be a tax efficient way of managing their assets. Knowing when to work with other professionals is commonplace, and the need for the input of a Pension on Divorce Expert (PODE) is now readily understood, the same should be said for financial advisors.
Pensions are not an easy topic to understand. The terminology is sometimes alien and complex, what it means in practice even more so. The pension freedoms brought in by the Pension Schemes Act 2015 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 from age 55 (increasing to 57 in April 2028), removing it completely from the pension pot and available to spend as they please, or in the worse cases, dissipate to try and frustrate a spouse’s claim. This of course has its consequences; the tax liability can be steep for those who takes more than 25% of their pension. Beware of this, some client’s may think that removing money from their pension to pay their former spouse a lump sum by way of offsetting is a potential solution, 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.
Of course, it would be impossible to write about pensions on divorce without referencing the Pension Advisory Group’s second report on the treatment of Pensions on divorce[1] (PAG 2). All practitioners who are involved in the financial remedy proceedings should read this report and look on it as an essential guide for family practitioners when it comes to pensions, especially in light of the case law which reaffirms the significance of the report as a tool for practitioners. The first iteration of the PAG report was published in 2019 and was a ground-breaking cross-profession report which reviewed the vast area of pensions on divorce and produced for the first time a comprehensive guide on how pensions should be treated. Contributors to the report included some of the most pre-eminent names in family law from solicitor and barristers to members of the judiciary; alongside pension actuaries and financial advisors. HHJ Hess stated in W v H [2020][2] that the report was “prima facie persuasive”, giving the report judicial approval as a resource on the subject. He later re-affirmed this in SP v AL [2024].
That cross-profession publication contains a wealth of information and guidance for practitioners. The report was subsequently updated in 2024 with the publication of a second edition. In the interests of full transparency, the author was a member of the second pension advisory group and was a contributor to the second report.
When it comes to the types of pensions. they 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, if required. The money in the pension is invested by the pension provider until retirement or the exercise of the party’s pension freedoms under the 2015 legislation.
Defined benefit pensions are usually pensions from an employer and based on a pension members’ salary. These also go by the name of final salary pensions or career average earnings (CARE), 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 do present themselves in divorce cases, especially parties with older pensions. The most common scenarios where these pensions still feature are cases involving employment within the NHS and uniformed services such as the armed forces, 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 could be 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 in turn pension accrual, has been sacrificed in favour of the other party’s, 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. In financial remedy cases, this is known as offsetting where a party keeps cash assets instead of sharing pension assets. This can be 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 needs. 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 or in property. 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 in the NHS which will provide a cash lump sum on retirement, and an index linked guaranteed pension income for life. 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 pensions particularly difficult to comprehend as they very much see it as their own asset that should not be shared.
A further issue is the perception that a pension is their own individual asset as it resulted from one party’s employment. Other, more realisable assets generated during the marriage appear not to (usually) have the same attitude attributed to them, but one of the first points to make to a party on divorce is that a pension, irrespective of when it was accrued, is an asset that must be considered on divorce. The law dictates that all assets are considered on divorce, albeit the extent of that treatment will of course turn on the facts of the case, but nevertheless a party has a obligation to comply with their duty of full and frank financial disclosure and that extends to providing a CETV (cash equivalent transfer value) of their pension. This is still applicable in those cases where pensions are not being shared, for example in instances where parties have mediated and agreed that due to their age or significant and unmatched pre-marital contributions their pensions are not being shared, they still must provide a valuation on their D81. A CETV should therefore be requested at the earliest opportunity.
Advicenow have produced a free online guide to the treatment of pensions on divorce which practitioners may wish to consider signposting their clients to for easy-to-read guidance on the process from an independent source. The guide goes through the divorce process and is written for those without legal knowledge, which can be a helpful resource especially for those where they do not have means to instruct solicitors to provide comprehensive advice, or for mediators who are not able to provide advice to the parties.
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, which in itself is a continuously evolving field of law, as will become apparent.
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[1] Pension Advisory Group, (2024) A Guide to the Treatment of Pensions on Divorce, Nuffield Foundation
[2] Hess HJ, W v H (divorce : financial remedies) [2020] EWFC B1 para 59