Until recently, a spouse’s pensions were not always considered as an asset in their own right. If they were, not enough attention was paid to sharing this asset equally between a separating couple.

Rule changes
Today all that has changed. Since December 2000, on divorce a spouse may now be entitled to half the main breadwinner's pension (whether husband or wife). This applies to any tax-free lump sum as well.

The general idea is to prevent hardship for a wife who may have given up her own career to raise a family, keep house, and otherwise make a very material contribution to her husband's success. Of course, the reverse also applies and it is the ex-husband who may have a claim on his former wife's pension. For simplicity this article will refer to the wife being the one having a claim on her husband’s pension assets.

How does pension splitting work?
Company pension schemes are usually valued at their transfer value - the amount of money that would be transferred if the holder moved it to another company scheme. 
Private personal pensions are taken at their fund value.

Valuing a pension fund is one thing - working out how to distribute it is quite another.

How to get your share of the pension

There are a number of options available to divorcing couples.

There are two processes: one is known as offset, the other earmarking. But since December 2000, there is a third option – pension splitting.
Offset allows one partner to keep the pension and award the other partner a greater share of the family home, for example. This has to be agreed by the court. The potential benefits are:

• It is the simplest method 

• It offers a “clean break”, which can be psychologically important 

• It can be useful where the pension values are small, the side has sufficient pension of their own or the priority is for one spouse to keep the matrimonial home. Earmarking means that when the pension finally pays out, in 20 years or so, part of the pension is reserved for the other partner. This has some benefits:

• It is useful where there is a need for continuing lump sum life cover or tax-free cash at retirement by the recipient ex-spouse. 

• The scheme member (usually the husband) remains liable for income tax on the total of the pension benefits after retirement.
  The problem with this system is that a former partner has to wait for the ex-spouse to retire before getting any money. If they choose to retire late, you have to wait longer. If they die before retirement you can sometimes be left with nothing. Which is where pensions splitting comes in.
  

• Since December 2000, divorce courts can order the immediate splitting or sharing of pension funds.
  This means that one spouse can lay immediate claim to a percentage of their partner's pension pot and move the money to another fund. They will no longer have to wait around for their partner to retire. There can be a cleaner break in the divorce and it allows each partner more direct control over their finances.
  Under the ruling part of one spouse's pension is transferred to the other, in effect providing two separate funds.
  The fund of the main breadwinner – usually, but not always, the husband - is “debited” and a new pension fund for the other spouse is “credited”.
  The advantages of pension-splitting is that the divorced spouse will continue to continue to receive her share of the pension if:

• She remarries 

• Her ex-husband dies (he cannot take his pension rights with him before she can draw her share of the pension).
  Nor does she have to wait if a husband decides to delay taking his pension.
  

What happens if you're not married?
Neither earmarking, offsetting nor pension sharing apply to people who lived together but were not married (cohabitants). Indeed, this is one of the weakest areas of the law in relation to unmarried couples: if you split up, you will not be entitled to any part of your former partner's pension.

If you would like to find out more about this subject please e-mail or contact us for further information.

Levels and bases of, and reliefs from, taxation are subject to change.