Pensions on divorce: recent updates

Pensions are a key asset on divorce, which are often overlooked or undervalued in settlement agreements.

Whether you chose to share your pension or offset it against a liquid asset, input from an actuarial expert will often be needed to help divorcing couples agree on an equitable financial settlement.

Pension Sharing Orders

A Pension Sharing Order (PSO) enables a divorcing couple to share their pension contributions. The Family Court has the ability to divide defined benefit schemes and defined contribution pensions.

Pensions can be included, alongside any property and additional assets, in the matrimonial pot up for division upon divorce. Once the divorcing couple have reached a financial settlement, a Consent Order is drawn up and sent to the Family Court to be ‘sealed’ and therefore made legally binding. The Consent Order provides authority to the pension scheme to enact a PSO.

The division of pensions is calculated using a formula which takes into account age, earnings, and any other relevant assets the individual may own. If a PSO is made over a particular pension, the receiver of an award can transfer the sum into their own pension, or merge with the original pension scheme.

Parties can choose to ‘offset’, which means taking a liquid asset in place of the pension sharing claim. The value of the offset – particularly for any defined benefit scheme – will need to be determined by an actuary to avoid an underselling of the position. Whether the cash equivalent pension value is reliable, whether input from a Pension on Divorce Expert (PODE) should be obtained, and whether adjustments should be made for tax purposes all need to be considered.

The importance of receiving independent advice and the cost of overlooking pensions was highlighted in the recent case of Joanne Lewis v Cunningtons Solicitors [2023] EWHC 822 (KB). The wife, having received nominal advice from Cunningtons Solicitors, and in the absence of full financial disclosure, formed a settlement agreement with her husband, omitting any claim to his pension. She signed a waiver to confirm the same. The husband’s police pension had a cash equivalent value of £540,712.60. The wife argued that Cunningtons were wrong when they stated that they could not advise her in the absence of full financial disclosure. The court agreed and held that where a solicitor becomes aware of a potential risk for its client, it is their duty to inform them of this risk. To provide adequate advice is not to go against the terms of the waiver. As such, Cunningtons were ordered to pay the wife £400,000, which was deemed a reasonable settlement figure had she received appropriate legal advice.

The Pension Advisory Group

The PAG, or Pension Advisory Group, is a panel of judges, legal professionals, solicitors, barristers, IFAs (Independent Financial Advisors), and pension actuaries (pension scheme advisors).

The PAG has released two reports to provide guidance, clarity and uniformity on pension sharing orders upon divorce. Thereports have clarified where a PODE should be instructed. The features of cases where a PODE may be needed are:

• where pensions are with public sector defined benefit schemes
• where couples have a significant age gap
• where low value pensions have guarantees which means that they generate benefits (as if they were of higher value)
• where the total combined Defined Benefit pension pot exceeds £100,000
• where a case is advanced on separating out non-matrimonial pension accrual from matrimonial pension accrual

The findings of the first PAG report contributed to the judge’s findings in the case of W v H (Divorce: Financial remedies) [2020] EWFC B10. HHJ Hess found that in a needs-based case where the couple was older and therefore approaching retirement age, sharing of pension income was considered more appropriate than sharing of pension capital. The court made reference to the fact that pensions should be treated as a separate asset, with post-retirement income being viewed as a standalone need (to that, say, of housing need).

PAG 2

The second edition of the PAG report became available on 16 January 2024. The premise of this report has similar parity with PAG 1, namely: too little cases apply PSOs; PSOs are still widely misunderstood; pension valuations are not obtained often enough, and when they are, they are too complex; and, approaches to pensions are inconsistent.

The second report specifically looks to expert assumptions when preparing a PSO, how experts should be regulated, and in what instance they should be instructed. Jurisdictional changes in lieu of Brexit have also been considered.

Key takeaways:

• Galbraith Tables

PAG 2 gave particular focus to the Galbraith Tables, which provide a ‘rough and ready’ formula to calculate the offset value for defined benefit pension schemes. The Galbraith Tables should be considered as a guide and not as a substitute for a PODE valuation.

• The marriage date

Where cohabitation leads to marriage, PAG 2 has suggested that there should be no differentiation between the status of the two. In general, the report was more explicit than PAG 1 in confirming that in relation to pensions, there is no one-size-fits-all approach, but that each PSO should be considered on a case-by-case basis.

• The McCloud Remedy

In 2014 and 2015, the Government underwent a review of public service pension schemes. Common examples include NHS and police pensions. Within their review, the Government introduced transitional protection for older members of such pension schemes. In 2018, the Court of Appeal ruled that younger members of the scheme were being discriminated against on the basis of their age, as such transitional protection did not apply to them.

The transitional protection, also referred to as the ‘underpin’, enabled pension schemes to compare the career average pension protected individuals built up before they reached the age of 65, with the pension they would have built up in their final salary scheme. If the latter was higher, the difference was added to their pension provision. However, this did not guarantee that all protected members achieved a pension as good as they would have achieved with the final salary scheme.

Due to the Court of Appeal’s findings, the Local Government Pension Scheme (LGPS), from 1 October 2023, removed the age discrimination, in a move otherwise coined the McCloud Remedy. The changes mean that younger qualifying members of public pension schemes can now receive underpin protection. In addition, new details for underpin rules have been published.

It is to be noted that your pension scheme will not be impacted by the McCloud Remedy if you turned 65 or left the LGPS before 1 April 2024. Importantly, underpin protection applies only to public scheme pensions built up between 1 April 2014 to 31 March 2022. From 1 April 2022 onwards, the underpin protection has been removed, and the career average scheme solely applies.

• Minimum retirement age

From the age of 55 you can start drawing from your pension savings. Exceptions to this rule are applicable in some circumstances. For example, if you are suffering from ill health, you may be able to draw down at an earlier age. From 6 April 2028, the minimum age to draw from your pension will heighten to 57. It may be worth reviewing future financial plans to see if two extra years of savings need to be accounted for. Those not impacted by this age increase are members of the firefighters, police, and armed forces public service schemes.

How can we help?

Pensions often form a considerable fraction of financial settlements on divorce. We can help advise you on how pensions may contribute to a financial settlement, whether actuarial advice is needed, and how the Family Court is likely to treat such pensions.