Will the retirement benefits
be divided equally?
During the 1980s and 1990s the courts put a great deal
of importance on the needs and reasonable requirements,
as set out in section 25 of the Matrimonial Causes Act
73), of the spouse rather than dividing the matrimonial
In most cases the needs have to be satisfied from limited
resources and the first priority of the courts is to ensure
that during settlement the former spouse (usually the
wife) and children receive the family home and maintenance
payments where applicable and the scheme member (usually
the husband) of the pension arrangements would retain
benefits. This approach would also apply to couples
with substantial assets and the wife would therefore receive
considerably less than 50% of the matrimonial assets.
Although the needs of a couple on divorce are important
for the court, since the case of White
v White (2000) where the matrimonial assets are substantial
the court should start with a 50/50 split of the assets,
including any retirement benefits, and only depart from
this rule if there is a good reason for doing so.
What pension schemes are known as defined contribution?
A defined contribution scheme could be offered by an employer
or set up by an individual as a private
pension. The benefits provided at retirement age by
a defined contribution scheme will be wholly dependent
on the contributions made by the employer, the individual
or by both. These schemes are usually administered and
the assets managed by a life assurance company where the
fund managers must be authorised by the Financial Services
At retirement the spouse can use a pension fund to buy an annuity and has the option to use an open market option to search for the highest pension annuity, adding all the features necessary such as escalation and frequency of payment. Once you have purchased an annuity it cannot be changed, so learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised pension annuities quote offering guaranteed rates.
An employer can offer the employees a defined contribution
scheme in the form of a group personal pension, group
stakeholder pension, occupational
money purchase or additional voluntary contribution
(AVC) scheme. An individual could establish a personal
pension, stakeholder pension or free standing additional
voluntary contribution (FSAVC)
scheme or have existing retirement annuity policies (RAPs).
What pension schemes are referred to as defined
Where the rules of a pension scheme specify the benefits
to be paid at normal pension age (NPA), then this is known
as a defined benefit scheme. Defined
benefit schemes are offered only by employers as part
of their occupational pension scheme, are commonly known
as final salary pensions and are governed by the Occupational
Pensions Regulatory Authority (OPRA).
The benefits paid at retirement age are based on the number
of years of service and the final salary of the scheme
member. These schemes were started by most 'blue chip'
companies to help retain the best employees as the benefits
to the members from a final
salary pension are much greater than from a private pension. However,
due to the high cost of operating these schemes most employers
are replacing them with occupational money purchase scheme,
group personal pension (GPP) or group stakeholder pension.
service schemes the government provides a final salary
pension to the civil service, NHS, teachers, fire, police
and local authorities and the Armed Forces Pension Scheme
operates a defined benefits scheme that covers the Army,
Navy and Royal Air Force.
How is the value of a defined benefit scheme determined
A defined benefit scheme will not have a fund value for
each members holding but rather the benefits at retirement
are projected as a pension income based on the members
current salary, the schemes accrual
rate, expected years of service and a final salary
adjusted for earnings growth including career progression
to retirement age.
Although during ancillary
relief proceedings the court will require the cash
equivalent transfer value (CETV), expert evidence from
a pensions expert can determine a fair value of the retirement
benefits from a defined benefit scheme. The CETV
Method from the provider assumes that the scheme member
will leave service at the time the valuation that is unlikely
to be correct. The procedure for collecting this information
is shown in detail in the step-by-step
It is therefore necessary for a pensions
expert to conduct a pension
audit on the assumption that the member (usually the
husband) will continue in service and that the former
spouse (usually the wife) will be entitled to benefits
that are greater than her percentage share of the providers
The suitably adjusted
CETV will reflect the circumstances and specific needs
of the parties on divorce and include death in service
benefits as well as discretionary benefits not included
in the CETV Method. It will also consider the other methods
used in the valuation such as the past service reserve
and the fund value of the scheme.
How is the value of a defined contribution scheme
calculated on divorce?
Calculating the value of a defined
contribution scheme is much easier than a defined
benefit scheme. This is because the value of these pension
arrangements depends on the contributions made to date,
the investment growth and the charges. Therefore the CETV produced by the provider and required during ancillary
relief proceedings as shown in the step-by-step
usually be sufficient in determining the value of the
Can a pension sharing order apply to the state
It is not possible to use a pension
sharing order against the members pension rights accrued
in the state basic pension. The former spouse will have
to apply to the Benefits Agency to secure retirement benefits
based on their former partners contributions. These benefits
will not be allowed if the former spouse re-marries before
the age of 60 as the new partners contribution record
will apply to the spouses state basic pension.
A pension sharing order as shown in the step-by-step
however be applied to the state earnings related pension
and the court will specify as a percentage the proportion
of state scheme rights to be transferred as safeguarded
rights to the former spouse.
Does the type of pension plan influence the
financial order percentage?
All pension arrangements, whether defined benefit, defined
contribution or state
pensions in the form of SERPS will in principle be
subject to the same percentage determined by the court
or agreed between the parties through their solicitors.
However, the needs of the parties may require different
percentages applied where there is more than one pension
For example, a retired scheme member with a final salary
pension and two personal
pensions in payment may have different rates of escalation
to protect the pension income against inflation. This
will influence the percentage applied by the pension sharing
order to each of these arrangements, as shown
in the step-by-step
the parties require a specific pension income, the payment
of which will also be influenced by the different annuity
rates for men and women.
For an earmarking order different percentages may be applied
as the court may decide that the former spouse requires
100% of the lump
sum death benefit from the members final salary pension
including 40% of the pension income and tax free lump
sum at retirement age.
Are there any advantages of earmarking over a pension sharing order?
The first advantage is that with an earmarking
order the former spouse can earmark the members lump
sum death benefit in addition to the pension income and
tax free lump sum as part of a final salary pension, whereas
a pension sharing order can only apply to the pension
income and tax free lump sum. This advantage would
provide protection to the former spouse if after divorce
she received maintenance payments from her former husband.
In the event of his death during service, these payments
would stop and by earmarking the lump sum death benefit
the former spouse will receive this money as compensation.
In most cases this benefit will represent four times the
scheme members annual salary. Another advantage is that
an earmarking order can be used during judicial
separation as well as divorce and nullity of marriage whereas a pension sharing order will only
apply to divorce and nullity.
After divorce, are the earmarking benefits to the
former spouse at risk?
There are significant risks to the former spouse and earmarked
benefits could be lost or reduced. The scheme member could
choose to stop the earmarked pension arrangement and this
would deprive the former spouse of a larger pension at
the members retirement
age. The earmarking order could be varied at a later
date but there would be an associated cost to the parties.
Another risk is that the member can choose to defer taking
the benefits until a later date so the former spouse may
have to wait for the members 75 birthday before receiving
the earmarked benefits. Further risks are that if the
scheme member died before taking the retirement benefits
the earmarking order would no longer apply and the former
spouse would not receive any benefits either in the form
of a pension income or tax
free lump sum and also the earmarking order will be
terminated if the former spouse re-married.
After divorce, are pension plans at risk
from a pension sharing order?
Once a pension sharing order has been implemented there
is no possibility for variation
of settlement order as it will be out of time and
also because of new provisions introduced to the Matrimonial
Causes Act 1973 (MCA 73) that protect the pension scheme
from further variation.
Therefore there will be no risk to the scheme member or
former spouse as a result of a pension sharing order and
they will be able to retain their percentage of the retirement
benefits. However, where there are pension
arrangements at divorce and no financial orders applied
at that time, then these arrangements would be at risk
from a pension sharing order or earmarking order in the