How to protect your pension in a divorce
11 May 2020
Apart from the family home, pensions are often our most valuable asset. Divorcing couples need to be particularly careful if one or both are employed by Local Government or the NHS, or are a teacher, a police officer, a member of the armed services, or have one of those (increasingly rare) generous employer pension schemes. Like all assets, unless there is a premarital agreement, pensions are a part of the marital pot that will be divided following a divorce.
Ways to protect your pension
There are several ways to protect a pension, the easiest is to ensure that both partners accrue their own pension savings through the marriage. If this is not possible, the best protection is good information. Pensions, like all of the family assets, need to be valued but pensions also need to be fully understood. Lawyers instruct experts (usually actuaries) to provide a report that sets out the valuable aspects of the pension, usually: income, tax-free lump sum, medical benefits, etc. This report becomes the foundation for negotiation or, if things go wrong, litigation.
Be wary of transfer values
The biggest mistake that people make about pensions is false comparisons. Pension providers are obliged to provide transfer values of a pension and often these values are the beginning and the end of the pension question – the shorthand being to add the two transfer values together and divide by two to get a fair valuation. The transfer value for many (most?) pensions is an incomplete picture of the pension benefits and this is an elephant trap for many DIY divorces.
The temptation to take the shorthand option is sometimes overwhelming; the expert reports are costly and take a long time to produce. However, without such a report the parties often do not understand what they are negotiating and make compromises that are very costly later in life. Protect your pension by obtaining the best information.
How much of the pension am I entitled to?
If your question is how much of the pension am I entitled to when we divorce, the best guidance comes from a report commissioned by the Pensions Advisory Board. If you can bear it, do read the whole report because it sets out the various options open to divorcing couples in (relatively) clear language. The courts have recently considered and approved of the general conclusions contained in the report.
4 pension protection principles
Most divorcing families face a downsize in their standard of living and have to make difficult compromises. Because pensions are in the ‘jam later’ category, they are often traded away too quickly. Some basic principles:
- Both parties need an income in retirement in the same way that both parties need a home, the starting point is that an equal division is a fair division. There are reasons to depart from equality but these are rare and complex;
- Be very careful when trading pension transfer value for cash or property equity (called offsetting), this is trading apples for oranges and needs careful thought and good information;
- Do not forget about the state pension;
- If you are being rushed to make a decision about a pension, be skeptical.
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