How to protect my pension in divorce

One of the questions we are often asked, in cases involving sizeable pensions, is how they can be protected from a claim from a spouse upon separation.

Pensions are generally treated a little differently to capital when looking at assets because, whilst a lump sum payment can be released from a pension, in reality all they represent is future income.

If you are asking the question how to protect my pension in divorce, once your marriage has hit difficulties or you have separated, the answer is, “you can’t”. When divorcing, both parties are under a duty to make full and frank disclosure of their financial circumstances. Any party that lies or tries to hid assets from the disclosure process could face some significant criticism, and indeed difficulties, if court proceedings are necessary.

If you are contemplating marriage, and you already have sizeable pension provision, then the only “protection” you can try to negotiate is via a Pre-Nuptial agreement. This is an agreement that is drawn up prior to the marriage and which deals with the assets of the parties, in the event that they were to divorce. It would be possible to contemplate excluding a pension from division in those circumstances.

In the absence of a Pre-Nuptial Agreement protecting or ring-fencing a pension, then pension assets will fall into the pot to be divided. There are three main ways that a pension would be divided on divorce.  

Firstly, there is Pension Attachment. This is an Order whereby the court order that part of a person’s pension due to them on retirement, is paid direct to the spouse instead. These types of orders tend to be considered where the parties are very close to or actually in retirement. There are issues, however, with Pension Attachment Orders, namely that the pension may die with the pension holder and therefore some element of life insurance would be required for the receiving spouse. Life insurance in people who are approaching or are of retirement age can be expensive.

Secondly, pensions can be shared by way of a Pension Sharing Order. This is where the Court order that part of a spouse’s pension is carved off and invested in the name of the other spouse instead. The pension division takes place at the time of the divorce and therefore it is open for either party to try and increase their pension provision following divorce. Pensions are sometimes divided according to their Cash Equivalent Transfer Values. Sometimes pensions are divided to provide equal income on retirement from the existing scheme. In those circumstances, the instruction of a Pension Actuary or similar expert is required to calculate precisely how much of the other spouse’s scheme a person needs in order to equalise the incomes.  

Finally, a pension can be left undivided following divorce, provided that other assets are utilised to offset a claim against the pension. This is often referred to as Pension Off-setting or Capitalisation. This is where a value is placed on a loss of a spouse’s right to enjoy the other spouse’s pension and a lump sum paid to them at the time of the divorce in order to compensate them. Typically speaking, such a lump sum attracts a hefty discount because the receiving spouse is obtaining money now instead of having to wait until retirement. This is one of the reasons why matrimonial equity is often divided unequally in favour of the spouse with the lower pension provision because they receive more cash now and leaves the other spouse’s pension intact.

There is, therefore, no definitive way of protecting a pension from division, following a marriage a divorce unless it can be protected by way of a Pre-Nuptial Agreement. If this cannot be achieved, then a spouse’s pension can be protected and remain intact but only if the other spouse agrees to receive a lump sum payment by way of compensation.

If you wish to discuss any of these issues with a fully qualified and experienced Family Solicitor then please contact one of the Harrowells Team.