20 years ago pensions were largely ignored in divorce settlements. Divorcing couples were well aware that the pensions were valuable assets – often more valuable than the house or the savings – but divorce law provided no mechanism by which they could be shared. As a result the party with no pension often lost out.
In some cases the value of the pension was offset against other assets, so one party might receive more of the capital assets to compensate for the loss of the pension. Frequently houses were traded off against pensions. However all too often the pension was the only valuable asset and off-setting was not an option
Another way to achieve fairness for the party with no pension (usually the wife) was to make a spousal maintenance order which indirectly gave the spouse a share of the pension income. A few resourceful spouses argued successfully that losing access to the other party’s pension was unfairly prejudicial to them, and so the divorce should not proceed.
But for most couples the issue was simply too complex and problematic and so the pension was just ignored.
The position started to change in 1995 when the Pensions Act introduced pension “ear-marking” orders, now known as pension attachment orders. Basically these were orders which required pension schemes to pay some of the pensioner’s income or tax free lump sum direct to the former spouse. In practice it soon became clear these orders had serious limitations and differed very little from spousal maintenance orders. If anything, the introduction of pension earmarking increased the pressure on Parliament to introduce a fair mechanism for sharing pensions on divorce. Finally in 2000 the Welfare Reform and Pensions Act 1999 came into force, making it possible to share a single pension fairly between two spouses.
For family lawyers who had been arguing for years for fair treatment of pensions this new type of order was extremely welcome, offering a means of sharing all the assets fairly between the parties and achieving a “clean break” in many more cases. Women’s groups saw it as a major step forward as for the first time the “stay at home” wife could come out of a divorce with a pension of her own, created by means of a credit from her husband’s pension.
Despite this Court statistics show that even now pension sharing and attachment orders are made in only about 8% of cases. Research and anecdotal evidence confirms the low uptake. It is not clear why divorcing couples have failed to take advantage of the opportunity to share what may be the most valuable marital asset. Possible causes may be:
- One or both parties need immediate access to capital, but pensions may not be available for many years
- Despite falling or stagnant house prices people still prefer “bricks and mortar”
- There is considerable uncertainty about the future value of many pension schemes
- Pension sharing can be costly (it currently costs over £3,000 to share an NHS pension)
- Pensions can be shared in many different ways, and obtaining advice on the fairest option from a specialist advisor can be costly also.
Sadly it is also true that even after fifteen years for many family lawyers pension sharing is still a challenging area of law, best avoided if other settlement options are available and easier to implement.
But used properly a pension sharing order is an extremely effective means of achieving a fair and balance settlement on divorce. The key point is to understand exactly what type of pension you are dealing with and how it fits in with the other assets. Specialist advice is essential – legal advice from experienced solicitors, and financial advice from specialist pension’s advisors.