On divorce pensions might be the priority to think about, but given their potential substantial value, pensions need to be carefully evaluated when considering the fair distribution of matrimonial financial assets.
It is important to obtain both legal and financial advice to ensure that appropriate consideration is given to how pensions might be taken into account.
There are different factors to consider:
- The type of pension, including ‘defined benefit’ and ‘defined contributions’
- The current pension values known as the ‘cash equivalent values’ (CEV)
- The calculation of the potential future pension income on retirement, which can be different for men and women
Types of pensions
There are also different types of pensions orders to consider with different benefits and risks for each:
Pension Sharing– when a specific percentage of a pension is distributed from the ‘pension member’ to their spouse after their divorce has been finalized. The receiving spouse is then safeguarded if the pension member dies before them. However, the receiving spouse might have to wait longer to receive their future pension benefit, especially if they are younger than the pension member.
Pension Attachment – when the receiving spouse receives an amount of income directly from the pension as maintenance, which can be increased over time if appropriate. However, that payment from the pension fund will stop whenever the pension member dies, making additional life insurance a necessary options for the receiving spouse.
Offsetting – this could be when little or no actual pensions order is made. Instead, the receiving spouse gives up some or all of their potential pension order claims and in return receives a larger share of capital. For example, the receiving spouse might receive more than half the equity in a family home (so they are ‘capital rich’) whilst receiving little or no pension benefits (so they are ‘pension poor’).
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Glossary of Pension Terms
Cash Equivalent Value (CEV) – The current lump-sum value of a pension, used to fairly divide assets in divorce.
Defined Benefit Pension – A pension that provides a guaranteed income at retirement based on salary and years of service.
Defined Contribution Pension – A pension where contributions and investment performance determine the retirement income; not guaranteed.
Pension Sharing – A court order transferring a percentage of a pension to an ex-spouse after divorce.
Pension Attachment / Pension Offsetting – A method where the ex-spouse receives pension income directly, or trades pension rights for other assets.