It is not compulsory to share pension benefits on divorce, which means that one spouse could be left financially burdened following a split.
Therefore, when deciding not to make any order regarding matrimonial assets, a court will consider all the circumstances of the particular case, according to Nigel Cayless, associate director at Sackers.
He says: “This will involve ascertaining all of the assets that are available – including pensions – and distributing those assets.
“The court’s overall approach is greatly influenced by equality – at least regarding assets built up during the marriage – and fairness.”
So what are some common issues that clients should be aware of when going through a divorce?
Pensions tax issues
For couples where passing on their pension as part of their inheritance tax planning, it may prove more tax-efficient to equalise assets between divorcing spouses by allocating other assets – like the ones that do not have favourable IHT treatment – first, suggests Paul Falvey, tax partner at BDO LLP.
He says: “This is a complex area: a recent guide on the treatment of pensions on divorce by the Pensions Advisory Group runs to 176 pages and only skims the surface of the potential tax issues.
“The individual circumstances of the couple and their assets will dictate what options are available and what pitfalls could arise with pensions, for example, some defined benefit schemes will be highly valuable but offer very little flexibility.”
To avoid any potential tax issues, the most important task is to identify and value all the assets the couple have, including future entitlement to the state pension, what tax issues could arise with each, suggests Mr Falvey.
He says: “For example, whether lifetime allowance protection of any type is in place, what flexibility there is around their pensions and the current ages and income and capital needs of each spouse.
“Then, with input from tax and pensions experts, couples can negotiate asset allocations, including pensions, that are tax-efficient…it may not always be tax-efficient or possible to pursue a completely ‘clean-break’ settlement where pensions are involved.”
While Victoria Walker, family solicitor and partner at Moore Blatch LLP, says: “Pensions are complex assets, for women especially, as they often take time out of their careers to have children, meaning their pension can be worth less than their husband’s.
“Additionally, pensions are one asset spouses often do not want to share and will, therefore, offer a lump sum in lieu of a pension share.”
She continues: “However, the actual value of a pension is often more than the monetary figure so agreeing to a lump sum could mean one spouse loses out.”
She adds: “For this reason, it is important to get a pension actuary involved...if there are other complex assets like businesses, clients should engage accountants to help come to an accurate valuation.”
