Until pension sharing was introduced in 2000, the policy holder’s fund would often be traded in settlement for money now.
This was called offsetting.
The latest Government statistics indicate that in only 36% of divorce cases where there has been a Financial Remedy Order, has there been some form of pension order including sharing.
This suggests that offsetting is still common and is the dominant practice. This appears entirely understandable, particularly in primary carers of younger children as it may help them to stay in their home. It is a quick, simple and cheap way of addressing the issue of capital and pensions on divorce.
However, there are dangers.
The first danger is that comparing pensions and other resources is a comparison between apples and pears. It is difficult to categorise a Pension as an asset as it often has no immediate cash value and it’s future value depends on the member living to retirement and assessing what is the pot at that point.
A three stage approach to offsetting is recommended.
- The pension is valued.
- A tax adjustment is made.
- A further adjustment is made for utility or the benefit of cash now rather than awaiting retirement.
Upon divorce, it is mandatory for financial disclosure to include a cash equivalent (CE) for a parties’ pension. In addition, defined benefit schemes with combined CE of over £100,000 should also have an advisory instructed early on deal with valuation issues. PODE (Pensions on Divorce Experts) should also be instructed in more complex cases where there is a material difference in the parties ages or where the pension includes guarantees.
Public sector schemes are the most problematic. For example, in the Armed Forces, there are currently 3 schemes all providing different benefits.
It is dangerous to delve into the area of pensions without an expert to advise.
PODE’s will put forward calculations based on certain assumptions and give a range of options. If the firm you instructed is inexperienced in pension sharing orders, they may not go down this route but we here at Ringrose do.
It is not for the PODE to recommend which option is best. It is for the solicitors to negotiate and the Court to consider those recommendations.
There are benefits to be learnt. The first 25% of any pension can be drawn tax free. There are also different ages at which individuals may draw the pension down. The earliest is generally 55.