By Fiona Tait, Pensions specialist at Royal London
Offsetting
Under this option the pension is not divided at all, but is valued and then matched, or offset, with alternative matrimonial assets of equal value. The member spouse retains their pension and the non-member spouse retains or receives alternative assets.
The great advantage of this route is that it facilitates a clean break between the divorcing parties, who can go their separate ways with no financial ties to one other. Solicitors will always look for a clean break settlement if at all possible, and so it is not surprising that offsetting is a common choice.
Offsetting is not however an “easy option”. It is a long-standing view of the legal profession that pension assets should not be considered of equal capital value to other assets, such as cash, shares and even property, and they are not always immediately available. This principle was reinforced in 2006 in the case of Martin Dye v Martin Dye.
If the pension is not immediately payable it is common practice to apply a utility discount to reflect this. Unfortunately, there is no common method for calculating or applying this discount and some rather arbitrary decisions seem to have been made, particularly where a pension expert has not been involved.
Earmarking a.k.a Attachment Order
Under this option a member of a pension scheme who is divorcing their spouse/partner retains ownership of the pension, however a legal Attachment Order is served on the trustees of the scheme directing them to pay a proportion of the benefits directly to the ex-spouse/partner. The Order may apply to one or more of the following benefits when they come into payment:
• The tax-free lump sum (PCLS)
• Pension income in payment (except in Scotland)
• Lump sum death benefits
Unfortunately Attachment Orders suffer from many drawbacks, principally because control of the pension is still with the member.
The member can, if they wish, choose to defer taking the benefits and/or could decide to stop paying ongoing contributions or alter the investment strategy.
As a result an Attachment Order is really only suitable in a handful of cases:
1. If the pension is already in payment (or close to it and the member undertakes to access them) so there is no extended delay before the ex-spouse/partner receives the benefits;
2. If the non-member spouse is much younger than the member spouse as this may allow the benefits to come into payment earlier than under a sharing order;
3. If the member is in ill health and life cover is required as part of the overall settlement an Attachment Order could be made on the existing death benefits.
Pension Sharing
This option involves the legal transfer of ownership of an agreed proportion of the pension fund from the member to the non-member spouse. Because the ex-spouse owns the transferred share this approach also lends itself to a clean break and the member is not forced to find assets of equivalent value to pass to the spouse. For this reason sharing is popular where the pension forms a large part of the matrimonial assets and/or the member wishes to hold onto other assets for practical or sentimental reasons.
Another advantage of pension sharing, which may look obvious to pensions professionals but not to solicitors concerned with an immediate settlement, is that for a spouse/partner who has little or no future income provision this approach will mean that they will have some pension income provision in their retirement.
Freedom and Choice in pensions
For spouses who are aged over 55 there has of course been another option since April 2015 – they could cash in their pension and use it to pay a lump sum settlement to their ex. Like offsetting, this is not as simple as it seems since the lump sum, if it represents more than 25% of the fund value, could be subject to a hefty income tax bill. This makes it a potential solution in cases where there is an immediate need for some cash, but it impacts on the individual’s own potential future pension income, which is likely to be a reduced amount leading to less income than they planned.
There is also a potential issue for clients with existing Attachment Orders. As mentioned, the original Order will have specified which pension benefits are to be attached. If pension income is specified and the member in fact elects to take the fund as a lump sum it is possible the Order will not take effect. This issue has already been highlighted by the FCA however they have not suggested a solution beyond the possibility that trustees might be required to inform ex-spouses if an “unexpected” application is made to encash benefits. Easy to say, much less easy to do.
In summary, the options available on divorce are extremely complex and so it is really worthwhile for individuals and their solicitors to consider receiving advice from a pension specialist to ensure that the best outcome is achieved for each individual’s circumstances. A one size fits all approach will not work.
|
