Separate lives, joint pension

New laws will make it easier for couples to divide assets, writes Pamela Atherton

One of the most bitterly contested problems of getting divorced has traditionally been how to carve up the main salary-earning partner's pension. But a new Bill is set to give divorcing couples greater flexibility when dividing up their assets, and will make it easier for them to split any pensions.

Because of the complexity of the Welfare Reform and Pensions Bill, pension sharing is not expected to come into force until the end of 2000 at the earliest. Until then, divorcing couples, can use "offsetting" or "earmarking" as a means of accounting for pension rights in financial settlements on divorce or judicial separation.

In 1973, the Matrimonial Causes Act allowed courts to consider pension rights in divorce settlements, but courts could only offset the value of pension rights against other matrimonial property. For instance, a divorcing mother with children might keep the house and offset this against the husband keeping his pension.

Courts could not order pension schemes to pay divorced wives a pension, and it was often difficult to obtain accurate information about the value of the member spouse's (usually the husband's) pension.

The 1995 Pensions Act introduced provisions for courts to earmark the member spouse's pension so that payment of some or all of this pension could be made to the non-member spouse (usually the wife) on the member's retirement.

Earmarking orders can also be used to order payment to the divorced wife of some or all of the maximum lump sum available on the ex-husband's retirement and the payment of death-in-service benefits to the ex-wife on his death.

But earmarking poses a number of problems, particularly in how the pension benefits should be valued. Earmarking also precludes a clean break between the divorcing couple, as the ex-wife remains linked to her former husband until his retirement. Furthermore, the divorced wife forfeits any right to her ex-husband's pension on his death or if she remarries.

For a young divorcee, the likelihood that she will remarry is quite high and her financial settlement should account for this. A divorcee can also take out insurance against her ex-husband dying before her.

Another problem with earmarking orders is that many are poorly drafted because few matrimonial lawyers have pensions expertise. The wife should ensure that her husband's pension is correctly valued by taking specialist advice from a pensions lawyer or an actuary. Otherwise, she may find that the earmarking order is worthless because it is not in accordance with the pension scheme's rules.

Pension sharing, by contrast, will allow occupational pension scheme trustees to give a divorced wife a "credit" in her ex-husband's pension scheme at the time of the divorce, effectively making her a deferred member of the scheme while a debit is made against the ex-husband's pension to reflect this.

The divorced wife can then choose to leave the deferred pension in her former husband's scheme or transfer it to an occupational or personal pension scheme of her own. Where the divorced wife has no existing pension arrangements of her own, or where her ex-husband was a member of an unfunded scheme (for instance, a public-sector scheme), she will have to leave the benefits in her ex-husband's scheme.

Most pension benefits can be shared in this way, except the basic state pension, because a divorcee can already claim a state pension based on her former husband's national insurance contributions.

For pension-sharing purposes, the pension must be valued on "the cash- equivalent transfer value" (CETV), which values the pension as though the member were leaving the scheme at the time of the divorce. This method is not entirely satisfactory, as it does not take into account potential salary and promotion increases before retirement, any surplus or deficit in the scheme, discretionary increases, death benefits or guaranteed annuity options (the latter in personal pensions).

Although the CETV is the only figure that can be used in court, divorcing wives' lawyers can use their own figures when negotiating the financial settlement. Any administrative costs incurred by pension sharing will be passed on to the divorcing couple, either directly or via reduced pension benefits.

The ex-husband should consider topping up his pension to compensate for the debit made against his scheme benefits.

Pension sharing is not retrospective, so it cannot be applied to any divorce settlements effected before the Welfare Reform and Pensions Bill becomes law. There is also no compulsion on divorcing couples to use pension sharing. Some may find earmarking or offsetting more appropriate.

"This is an area where people must take great care. Their long-term standard of living is at stake," says Jane Marshall, pensions and divorce specialist at law firm Hammond Suddards.

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Pricing Analyst

£30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

Guru Careers: C# Project Team Lead

£55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

Day In a Page

Why the cost of parenting has become so expensive

Why the cost of parenting has become so expensive

Today's pre-school child costs £35,000, according to Aviva. And that's but the tip of an iceberg, says DJ Taylor
Fifa corruption: The 161-page dossier that exposes the organisation's dark heart

The 161-page dossier that exposes Fifa's dark heart

How did a group of corrupt officials turn football’s governing body into what was, in essence, a criminal enterprise? Chris Green and David Connett reveal all
Mediterranean migrant crisis: 'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves,' says Tripoli PM

Exclusive interview with Tripoli PM Khalifa al-Ghweil

'If Europe thinks bombing boats will stop smuggling, it will not. We will defend ourselves'
Raymond Chandler's Los Angeles: How the author foretold the Californian water crisis

Raymond Chandler's Los Angeles

How the author foretold the Californian water crisis
Chinese artist who posted funny image of President Xi Jinping facing five years in prison as authorities crackdown on dissent in the arts

Art attack

Chinese artist who posted funny image of President Xi Jinping facing five years in prison
Marc Jacobs is putting Cher in the limelight as the face of his latest campaign

Cher is the new face of Marc Jacobs

Alexander Fury explains why designers are turning to august stars to front their lines
Parents of six-year-old who beat leukaemia plan to climb Ben Nevis for cancer charity

'I'm climbing Ben Nevis for my daughter'

Karen Attwood's young daughter Yasmin beat cancer. Now her family is about to take on a new challenge - scaling Ben Nevis to help other children
10 best wedding gift ideas

It's that time of year again... 10 best wedding gift ideas

Forget that fancy toaster, we've gone off-list to find memorable gifts that will last a lifetime
Paul Scholes column: With the Premier League over for another year, here are my end of season awards

Paul Scholes column

With the Premier League over for another year, here are my end of season awards
Heysel disaster 30th anniversary: Liverpool have seen too much tragedy to forget fateful day in Belgium

Liverpool have seen too much tragedy to forget Heysel

Thirty years ago, 39 fans waiting to watch a European Cup final died as a result of a fatal cocktail of circumstances. Ian Herbert looks at how a club dealt with this tragedy
Amir Khan vs Chris Algieri: Khan’s audition for Floyd Mayweather may turn into a no-win situation, says Frank Warren

Khan’s audition for Mayweather may turn into a no-win situation

The Bolton fighter could be damned if he dazzles and damned if he doesn’t against Algieri, the man last seen being decked six times by Pacquiao, says Frank Warren
Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

Blundering Blair quits as Middle East peace envoy – only Israel will miss him

For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
Fifa corruption arrests: All hail the Feds for riding to football's rescue

Fifa corruption arrests

All hail the Feds for riding to football's rescue, says Ian Herbert
Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

The Kurdish enclave still resisting the tyranny of Assad and Isis

In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

How I survived Cambodia's Killing Fields

Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US