Pensions have largely taken over from property as the most valuable matrimonial asset in a Judicial Separation or Divorce case. Until quite recently, one’s primary assets consisted of property, bank accounts, cars etc. However, there is no doubt but that pensions have now become the primary focus.
Until the mid 1990’s there was no way of splitting pensions on a marital breakdown. Separation agreements, which tried to agree a simple split of the benefits were not, and are still not, enforceable against pension scheme trustees.
The Family Law Act, 1995 and The Family Law (Divorce) Act 1996 were introduced and enabled the Courts to share out pension rights between separating or divorcing couples. These pension rights cannot be shared without a court order.
A Pension Adjustment Order is an Order made by a Court affecting an individual’s pension. Such an Order can be made by a Court following a Judicial Separation or Divorce. It is important that you understand the type of pension that you hold.
In general, there are two types of pensions:
1. A Defined Benefit Pension and
2. A Defined Contribution Pension
A Defined Benefit Scheme is a defined level of pension benefit at retirement, usually based on your years of service and your earnings at retirement. The value of a Defined Contribution scheme is determined by the level of contributions paid, the investment returns achieved and the fees and charges where applied.
There are two main pension benefits which derive from those pensions mentioned above: a retirement benefit and a contingent benefit. Evidently, a retirement benefit is a benefit paid on retirement for example a lump sum or a gratuity. A contingent benefit, commonly known as a ‘death in service benefit’, is a benefit received on the death of the member under the relevant scheme rules. For example, if a husband dies aged 58 years, where his normal pensionable age was 65, a contingent benefit will become payable to his widow or if he is not survived by his widow, then to his dependent children.
Either party to a Judicial Separation or Divorce may apply for a Pension Adjustment Order for his or her benefit or for the benefit of a dependent child. Certain Pension Adjustment Orders cannot be made for the benefit of a spouse that has remarried. Also, an Order made for the benefit of a dependent child is only applicable for as long as that child remains a dependent.
A Pension Adjustment Order, once made, authorises the pension trustees to pay out a particular benefit to a spouse or a dependent child.
In addition to the above, the Court may also order a split of a pension i.e. it may split a pension in two and place half of the pension in the name of the other spouse.
Currently, pension payments made under a Pension Adjustment Order are treated as income and, subject to any tax free allowance, are chargeable to income tax under the PAYE system in the same way as the member’s pension. Separated spouses will be assessed to income tax as a single person unless they elect for joint assessment. Where a divorce has been obtained, each spouse will automatically be assessed to income tax as a single person unless he/she marries.
Overall, pensions are extremely complex in nature and should be considered in detail. There are many rules that apply to Pension Adjustment Orders on separation, which may assist your particular circumstances. It is very important to get proper legal and pension advice so as to adequately protect yourself now and in your old age.