Pensions

For some years now practitioners have been recognising the increasing importance of pensions when negotiating divorce settlements. This is a particularly complex area of family law so it is essential that the relevant issues are analysed carefully before any financial settlement is agreed. What follows is a brief introduction to the topic, however we would strongly recommend that you obtain comprehensive advice.

There are two types. “Category A” is the flat rate basic pension. The sum payable depends upon the contributions made by you and your spouse during the marriage. “Category B” pensions include SERPS (now called state 2nd pension -S2P) . The additional benefits are paid by the state if contracted in, by an employer’s scheme if contracted out or through an individual personal pension. The self-employed do not qualify for SERPS (S2P) but instead pay significantly lower National Insurance contributions.

There are a variety of private pension schemes in operation, including statutory (eg the Armed Forces), occupational (eg British Telecom), personal pension policies or small self-administered pension schemes.

The amount of pension payable depends upon the type of scheme. For the statutory scheme the sum is calculated by reference to the number of years worked by the employee. In contrast, under a personal pension policy or money purchase scheme the amount of pension payable depends upon the annuity that can be purchased with the funds that have accrued from the contributions made by the policyholder under the terms of the policy.

Subject to the way in which the court exercises its powers (see below) a divorce can affect benefits in a number of ways eg. a divorced wife will not get any credit based upon her ex-husband’s contribution towards S2P benefits and will usually lose her entitlement to a Category B pension unless the divorce occurs after her 60th birthday. If the divorced wife subsequently re-marries her entitlement to a state pension will be based only upon contributions paid after the divorce by the new husband, so this could cause a real problem for elderly divorcees.

In all cases where the divorce proceedings began after the 1st December 2000 the court has the power to make a Pension Sharing Order. This means that it can adjust a person’s pension provision so as to award their spouse a percentage interest in the value of the fund. Once an Order is made, the beneficiary will have an absolute entitlement to the fund.

Many schemes insist on a transfer out of the scheme the effect of which is likely to mean that the value of any pension subsequently purchased will be rather less than the value of the pension had it remained in the scheme. Before any Order is made it is important to clarify whether or not there has to be a transfer out of the scheme. Advice from an independent financial advisor should be obtained and we can assist you with this. In the case of unfunded schemes there can only be an internal transfer, whereby the beneficiary of the Order becomes a member of the scheme.

An alternative approach is to ask the court to make an Attachment Order. If an Attachment Order is made, the pension provider will be required to make payments, again expressed in percentage terms, for the benefit of the person entitled to the Order. These payments will only be made when and if they become due. Under the Rules it is also possible to obtain an Order requiring a party to exercise a right of commutation so that a lump sum payment will become due at some time in the future. There are also provisions enabling the court to make an Order that any lump sum payable on the death of the person with pension rights should be paid to another party and the person with pension rights can also be required to nominate another beneficiary to receive that lump sum payment in the event of his/her death.

The difficulty about Attachment Orders is that the person who has the benefit of the pension can decide when the payments should be made. As such, the spouse may be kept waiting for a significant period of time before receiving them. Furthermore in the event of subsequent re-marriage any provision regarding income payments will end and in certain circumstances it is possible to apply to the court to vary the terms of that provision and the amount of the delayed lump sum payment required to be made. For these and other reasons the conventional view is that pension sharing is preferable to attachment, provided that appropriate arrangements can be made in the case of a wife and young children to protect their position in the event of the death of the other parent during any period.

How does the court use these powers? The overriding objective will be to ensure that a fair solution is achieved. There are a number of matters that require careful attention before deciding on the appropriate Order to seek. These include:

a) The requirements of the family: In certain circumstances it may be appropriate to seek a larger share of the liquid capital available for distribution because the immediate priority is to provide housing for the family.

b) The significance of any death benefits payable under the relevant scheme: Where somebody will continue to receive maintenance for the foreseeable future it is essential to ensure that appropriate arrangements have been made in the event of the unforeseen death of the payer.

c) The age of the parties concerned: In some circumstances the court may conclude that it is unnecessary to make any Order particularly where both parties are young and have sufficient time to make provision for themselves.

d) The value of the fund: This can be a particularly difficult problem because the Cash Equivalent Transfer Value (CETV) (which is the figure required by the court) does not always produce an accurate valuation of the benefits payable. Thus it may be necessary to investigate this in more detail so as to ensure that a fair award is made.

Both parties need to bear this in mind at all times. There is absolutely no point in litigating over a relatively small value fund.