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Sharing pensions on divorce

Sarah Crilly, Associate in the Family team, looks at the difficulties of sharing pension provisions on divorce.

Principles on which the courts act in divorce cases when dividing assets between spouses and in particular pensions have risen in prominence following a recent reported case.

The courts dealt with a couple aged 56 and 61 who had married in 1985 and had 2 adult children.  The couple’s capital assets included properties, investments and interests in trusts and businesses worth £12.3m.

It was common ground that there should be an equal split of capital assets and a clean break. The pensions could not be approached in the same way.

There was a disparity between the couple’s pension provision. There would have to be either an off-set or a pension sharing order but pension sharing was not an option because it would take the Husband over his lifetime allowance with severe taxation consequences.

The couple disputed about how they wanted the court to calculate the offset and the court had refused an actuarial report which would have assisted the court in this process.

The couple had very different pension provision – the wife had a defined benefit scheme based on her final salary. The husband had a defined contribution pension in a SIPP (Self Invested Personal Pension). They had both commuted their 25% tax free lump sum.

The wife was unable to cash in her pension and could only take income for her life.  Her income stream was fixed and index-linked.

In contrast, the husband could withdraw the remaining funds in his pension, subject to the payment of income tax.  However, the future value of his pension and income stream derived from it was subject to the vagaries of the market.

The husband’s pension pot was worth £970,000 and the wife’s was £3m.  Carrying on the equal sharing principle to the pensions meant the husband was due an extra payment from the wife to cover the disparity between them.

The wife argued that the Cash Equivalent (CE) Value was not to be treated as equivalent to cash for offsetting purposes and the court should use Duxbury, which is a table that matrimonial lawyers refer to in calculating the lump sum necessary to meet a person’s particular income needs over his or her natural lifespan.  It is essentially a cash flow projection built on certain assumptions.

The husband asked the court to carry out different calculations including treating the CE value as if it were cash and using annuity calculations.  The court preferred the wife’s approach.

As her pension was in payment, the court felt the CE value should not be treated as cash and, despite the lack of an actuarial report, they were still able to calculate an appropriate offset using the Duxbury method.

Had the wife’s pension not been in payment and had there been little assets then the court would have to approach matters differently.

The couple’s needs would have dictated a different approach and in those cases where precision is necessary, an actuarial report would have been required looking at other options such as equality of income in retirement.

As can be seen in this case, pensions are a complex but important issue when it comes to the assets involved in any divorce. As a result, divorcing couples should take expert professional advice on the subject.

* For more information on the issues raised by this article please contact one of our specialist divorce solicitors.

Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.

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