Most people are worried about the fate of their home, most likely the largest asset they have, during a divorce. But for those who have been married for a long time or where income levels have been substantial, the value of the pension may also play a vital role during a divorce. Now that you’ve built up a nice nest egg for your retirement, what happens to it when you get divorced?
In most cases, it is the courts that will decide on how the pension assets will be divided up among the parties. In most cases, the court will decide on an equal division of assets, which means 50/50. However, this may vary from case to case and a 50/50 division is where the courts will start their deliberations at.
Most types of pensions can be divided upon a divorce. However, the most complex type of pension to divide are the defined benefit schemes. This is because the final pension pay-out amount is based on the years worked and final salary and there is no ‘current’ pension value to work with. In many cases, an actuary will have to be called in to estimate what the pension value will be, by looking at things like possible career progression, wages increases and so on, and come up with a final number that will be used to divide pension. In extreme cases, you may have to pay the value of the pension out in a lump sum cash payment to your spouse.
In contract, defined contribution schemes, the basic state pension and state earnings related pension scheme (SERPS) are relatively easy to divide between the parties. All these schemes will have a underlying fund to work with and since payment is based on how much was contributed, the calculations are relatively straightforward. However, the state pension schemes may take administratively longer to divide and complete the paperwork, compared to private pension schemes.
It is important to consult a pension specialist, as your contributions to your pension fund will become restricted or regulated by the divorce settlement and it is important to make sure that you are complying with the court’s decision after the completion of the divorce settlement.