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Financial Settlement On Divorce

Key Points

  • It’s best if you can reach an agreement between yourselves about how to split your finances
  • Your solicitor can negotiate an agreement with your ex-spouse’s solicitor by applying the law and previous case precedents
  • You’ll have to consider all your assets such as property, income and pensions
  • Dividing pensions is very complex and there are numerous ways pensions can be split and offset against other assets
  • If you can’t agree either between yourselves or via your solicitors out of court, either of you can apply to the court to ask them to impose financial remedies and decide for you
  • Our family team is Legal 500 recommended

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Thankfully, these days, very few cases end up going to trial where a judge is forced to impose a financial order on a divorcing couple. Here at Graysons, we firmly believe that all cases are capable of settlement out of court, provided that both parties keep an open mind and listen to their legal advisors. Remember, agreements are usually borne out of compromise and it is important to stay focused on the bigger picture and keep proportionality with regard to costs.

When two households need to be financed, usually out of the same resources that previously maintained one family home, there is inevitably a tightening of the purse strings except in the most affluent of cases.

The court is primarily concerned to make sure that ‘needs’ are met: firstly, the needs of any dependent children of the family and, secondly, the needs of the parties themselves. Contrary to popular belief, there is no gender bias in law where women are favoured over men or vice versa. Traditionally, it was more likely that women would stay at home to look after children or return to a part time job after maternity leave but, these days, there’s an increasing number of high-flying career women and house-husbands in a reversal of these traditional roles.

What is a ‘need’ can vary from case to case and to some extent is dependent upon the resources available, but recent case law suggests that a need is a ‘reasonable requirement’.

Lawyers often refer to ‘the family pot’. This means all of the property, savings, assets, pensions, investments, debts and income resources belonging to the divorcing couple. A distinction is drawn between ‘matrimonial property’ and ‘non-matrimonial property’. The former is subject to the sharing principle; the latter is not, but can still be used to meet ‘needs’.  Before we can start to consider how a family pot might fairly be divided, we need to know what it is worth. A comprehensive schedule of assets, liabilities and income will usually be prepared by the lawyers.

Outcomes are decided by applying the law.  Read about the law here:

The law on dividing finances upon divorce

In England and Wales, the law is set out in two different ways. Firstly, by statute (an Act of Parliament) and secondly by case law, where decisions made by senior judges in our higher courts become precedents for how we should interpret the statutes in our other cases.

The factors which the court must take into account are set out in section 25 of the Matrimonial Causes Act 1973 and are summarised as follows:

  • The income, earning capacity, property and other financial resources which each of the parties of the marriage has or is likely to have in the foreseeable future
  • The financial needs, obligations and responsibilities which each of the parties to the marriage has or is likely to have in the foreseeable future
  • The standard of living enjoyed by the family before the breakdown of the marriage
  • The age of each party to the marriage and the duration of the marriage (duration includes seamless cohabitation leading to marriage)
  • Any physical or mental disabilities
  • The contributions made by each of the parties to the marriage, which can include both financial and non-financial contributions (such as looking after the home and caring for the children)
  • The value to each of the parties of the marriage of any benefits such as pensions that they will lose the chance of acquiring on divorce.

Broadly speaking, the court will consider three main issues;

Assets

This includes assets such as property, stocks, shares, investments and savings policies, for example.

Both of the divorcing couple’s housing needs will be considered when deciding how assets should be split. There will also be consideration as to whether either of them has separately brought or contributed assets to the marriage by way of inheritance, business or property they owned prior to marriage. However, the fact that one of them has contributed assets doesn’t necessarily mean that he/she will be compensated for doing so. That will depend on the needs, resources and when and how those assets were introduced into the marriage.

Income

The court is under a duty to consider whether or not a clean break settlement can be achieved in any financial divorce matter. The court likes to encourage parties to become financially independent as soon as possible and to maximise their own earning capacities.

Sometimes, however, one person can claim maintenance from their husband or wife over and above any child maintenance they receive. This is to ensure that needs are met and to reduce the disparity in incomes between them. This doesn’t mean that maintenance will be forever; it can be for an indefinite period or sometimes for a very limited time, for example, to enable a spouse to retrain or until children reach a certain age. Maintenance orders come to an end automatically if a recipient remarries and when either the payer or recipient dies.

Alternatively, a spouse can receive more of the assets to make up for loss or lack of income. This is known as ‘off-setting’.

There is no legal entitlement to an equal sharing of income. Maintenance is considered on a ‘needs basis’ (generously interpreted) to reflect all the circumstances of the case.

Pensions

This is a complex area. There are many different types of pension schemes, including occupational, final salary (deferred benefit and deferred contribution schemes), company/work pensions, personal/private pensions, money purchase schemes, stakeholder pensions, self-invested personal pensions (SIPPs), additional voluntary contributions (AVCs) as well as state pensions. The rules relating to pensions went under radical reform with the Pensions Act 2014 and the Taxation of Pensions Bill which came into force in April 2015, when existing restrictions on access to pension pots were removed, making it easier to access your entire fund as you wish (subject to income tax implications).

Which types of pensions can be divided on divorce?

At the moment, the only pension that can’t be split upon divorce is your basic state pension. If you qualify for the basic state pension – that is, you’ve paid enough National Insurance years on your working record – then this will not currently be affected by divorce.

However, most other types of pensions could be ordered by a judge to be divided between a divorcing couple.

How is a pension valued during a divorce?

Divorcing couples will need to consider the respective cash equivalent transfer values (CETVs) of their pension funds. Only the pension scheme member (the person who took out the pension) can request a valuation of their pension, not the ex-spouse who wants to access it. However, it is easy for the pension holder to ask the company providing the pension to send a CETV statement.

It’s easy to misunderstand true pension values when not comparing ‘like with like’. Some pension schemes are more valuable than others and sometimes the CETV will not represent the true value of the pension fund for divorce purposes. A company pension will usually be valued at its transfer value, but private personal ones could be valued at their fund value. Also, final salary pension schemes are very difficult to value as they involve projecting both a salary and a pension fund quite far into the future. A CETV for a final salary scheme will therefore not give a very accurate valuation. It’s essential that legal advice is taken before deciding on how to deal with pensions on divorce, and it’s useful to get pension valuations double-checked by an actuary, given the complexities.

It’s also important to note that it’s not easy to automatically equate a £200,000 house with a pension pot of £200,000!

There are four main pension-splitting options:

Type of pension division

What is it?

What do you need to know?

Does it provide a clean break?

Off-setting

 

This is where one party of the marriage may receive a greater share of property/savings in trade off against the other spouse retaining his or her pension.

Off-setting is commonly used but it may be necessary to seek advice from a pension expert as to what the appropriate off-setting asset figure should be. Where the pension fund is the most valuable asset, it may be that there are insufficient assets to trade off against it.

You can agree between yourselves to offset your pension and assets – you don’t need a court order.

Mostly, yes. It means you’re both fairly financially independent of each other, since it’s a trade-off between different income sources/assets at the time of divorce. However, it’s important also to have a ‘clean break order’ issued to fully ensure this.

Earmarking (or attachment)

 

This means that a portion of the pension fund is ‘earmarked’ for the other spouse upon retirement.

There are tax implications with earmarking as the pension benefits are treated as income for the member and could result in higher rate income tax liabilities even though part of the income is paid to the former spouse.

Only a court can issue a pension attachment (or earmarking) order.

No – it doesn’t allow for a clean break between the divorcing couple, because the control of the pension scheme remains with its member. The recipient is therefore still dependent upon the member of the scheme reaching retirement age and the pension would come to an end in the event of the member’s death. This could result in severe financial hardship to the receiving spouse. Earmarked orders can also be varied which excludes the certainty and finality of a ‘clean break’.

Sharing

 

When a pension sharing order is made, it means that a particular pension fund is split into two where the pension member receives a pension debit to his/her fund and the ex-spouse receives a corresponding credit.

Some pension schemes allow for internal transfers whereby the receiving spouse can set up their own pension fund within the same scheme. Some schemes, however, insist on an external pension transfer where the pension credit must be paid into a different pension scheme altogether.

There is often a fee payable by the pension trustees to administer a pension sharing order.

Only a court can issue a pension sharing order and the divorce must have concluded before this type of order can be implemented..

Yes – the benefit of pension sharing is that it facilitates an immediate clean break on pensions and encourages financial independence.

 

Deferring

There are two kinds of deferring:

  1. Deferred pension sharing.

If one partner has already retired and is claiming from their pension, but the other partner is still too young to be paid a pension, you can agree to share it at a later date.

  1. Deferred lump sum.

When one partner retires, a lump sum is paid to the receiving ex-spouse.

Deferred pension sharing is complex to arrange so requires detailed legal advice.

It depends on the pension and the individual arrangements made – but it does rely upon one or both of you reaching retirement age in order for the pension to be paid to either party.

What happens to your pension if you’ve been married and divorced before?

If your spouse has been married before and their first wife or husband has been granted a pension sharing order against your spouse, you (as the subsequent spouse) can also apply for a pension sharing order on the same pension. This means your spouse’s pension will be shared between them, you and their previous spouse.

What if you’re divorcing after one or both of you have retired?

As the calculation for the pension trustees is more complex, you are not entitled to free CETV each year so there will be a fee to pay.

What do the 2015 pension reforms mean for pensions and divorces?

With the new pension freedom reforms that came into force in April 2015, pension holders now have increased freedom to take out their entire pension pot as a cash lump sum – instead of taking some out and having to buy an annuity (guaranteed income) with the rest. Previously, pension holders were allowed to access only 25% of their pension fund as a tax free lump sum, only once, and had to take the rest as an income. So, for people divorcing since 2000, attachment orders were drawn up with the main purpose of earmarking the remaining annuity/income for the receiving ex-spouse – because nobody ever envisaged the government allowing such free access to pension pots!

If you’re already divorced and have an earmarking or attachment order in place on your ex’s pension, it’s really important to check the wording of the order to see if it covers you if your ex-spouse takes their entire pension pot as a lump sum – and if not, to potentially seek an amendment to the order.

You have landed on this page as Watson Esam has merged with Graysons

You can read more about the merger here. Graysons will be pleased to help with your enquiry. Please visit our web pages or contact us directly on 0114 358 9009

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