On the Halloween theme, family associate Harriet Collins advises on "nightmare" legal issues that can arise following a divorce or separation.
Our first “Halloween nightmare” involves pensions on divorce…
“A husband and wife agree to share their pensions equally on divorce. They both have several different pensions and, on the surface, it appears as though the husband has a larger pension pot than the wife. Rather than seeking any advice, the husband and wife simply add together the pension values (otherwise known as Cash Equivalent Values (“CEVs”) or broadly what it costs to purchase the same value pension on the open market) and divide them by two. A pension sharing order is made in favour of the wife to achieve equality. A few years have since passed and the husband and wife, having now both retired, are drawing down on their pensions. The wife’s pensions provide her with a sufficient income but the husband is drawing a much lower income and is left struggling to meet his needs. The husband wakes up in a cold sweat…”
Luckily it was all a dream, but how can this scenario be avoided?
Pensions are an important asset when considering finances on divorce but can sometimes be ignored or their importance to the long term financial circumstances of the parties downplayed. Pensions come in all different shapes and sizes. There are workplace pensions and private pensions, some pensions depend on the performance of investments whilst others are linked to an employee’s salary. The list goes on and on but the main point to take from this is that with so many different types of pension it also means that there are different ways of valuing pensions and that CEVs are not always reflective of a pension’s true value. There are also different and sometimes hidden benefits connected to pensions as well as different options for drawing funds from pensions which can result in different tax consequences.
Whilst it can sometimes be the case that pension assets may be relatively straightforward and that simply adding the CEVs together and dividing them by two results in the desired outcome, more often than not that is an overly simplistic view that carries its own risks and can result in detriment to one of the parties on divorce.
Before reaching an agreement, you should therefore consider taking legal and financial advice to assist with identifying the true value of a pension, what benefits it may hold and what income it may generate in the future. In that way, the decision can be made about how to best divide a pension with both parties being fully aware of the options and risks involved.
The family team at Russell-Cooke can help advise you on financial matters arising from a divorce including the treatment of pensions.