What happens to pensions in divorce? An overview
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This topic will be spread over four posts. An overview of how pensions are affected by divorce is provided below, and the following three entries will go into greater detail on the three options.
A common concern for many divorcing couples is what will happen to the pensions - are they considered individual and so remain with the respective holder, or are they split like other assets?
In the divorce courts, a pension is seen as an asset (often second only to the house in terms of value) and is divided as such. Some may consider this unfair, but in the past it was not uncommon for women to not have a pension because they were mothers and housewives, while many other women opted out of their pension because they were part of their husband's. With half of marriages now ending in divorce, not treating pensions as assets would leave a lot of women without a retirement fund.
However, there is not a set formula for the division of income and assets during a divorce, which means that pensions can be considered in a multitude of ways and will be based on the circumstances of the couple seeking a divorce. For example, longer marriages tend to result in more generous allocation of pension rights. In some cases, such as if both the husband and wife have individual pension provisions, the pensions can be ignored entirely.
The rules on pensions in divorces have changed a lot over the years. It was in 1973 that the Matrimonial Causes Act was passed, which allowed pensions to be the subject of a claim during a divorce by offsetting against other assets.
It was over two decades later that the Pensions Act 1995 was introduced. This legislation brought in earmarking, which is when the ex-spouse is allowed a share of the holder's pension and receives payment when the holder receives their benefits, which are reduced accordingly. However, earmarking had a number of disadvantages that put pressure on reform - namely that the ex-spouse did not receive any payment until the holder began receiving a pension income, which could have been many years later as the court had no power to stipulate a date for pension income to begin, and the ex-spouse had no control over where the fund was invested.
Finally, in December 2000 pension sharing was introduced, and it allowed the ex-spouse to receive a share of the pension immediately. However, pension sharing did not override earmarking or offsetting, and today all three options are available. The Civil Partnership Act 2004 also offered the same regulations to the dissolution of civil partnerships too.
The next entry will examine the offsetting of pensions against other assets.
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