Last month the Pension Advisory Group (PAG), released a report which provides an essential guide on matters relating to pensions and divorce. Aimed at family law practitioners, judges, and pension advisors, the aim of the report is to provide clear guidance on pension sharing in divorce financial settlements.
What is the Pension Advisory Committee?
The PAG is a group of multi-disciplinary professionals, who specialise in divorce financial settlements. It is jointly chaired by Mr Justice Francis and His Honour Judge Edward Hess and is supported by the President of the Family Division and the Family Justice Council.
For over two years, the PAG has been working on creating a definitive guide which clarifies the many complexities relating to pensions and divorce. It aims to end the lack of understanding of how professionals should deal with the valuation, sharing, or offsetting of pension fund assets.
In its forward, the report outlines the urgent reason for the guidance:
“Pensions are often the single largest asset after the family home for divorcing couples, yet there is inconsistency of approach to pensions across England and Wales and a considerable shortfall in understanding. Divorcing spouses are often unaware of their rights and still less aware of how to begin to approach the issue of a fair split of pension assets. The matter is further complicated by repeated changes in the law governing pensions, such as the Lifetime Allowance which has fundamentally altered the landscape in this area.”
What does the PAG report cover?
The key recommendations in the report cover:
- the best practice regarding gathering information on a client’s pension pot, including private pensions, work pensions, state pensions, overseas-based pensions, as well as benefits such as death benefits, guarantees, and other potentially complicating features
- how to approach valuation for the purposes of coming to a fair financial settlement, including ‘needs-based’ and ‘sharing-based’ cases, and situations where there is a large income gap between the couple
- pension tax issues and potential interactions with means-tested benefits.
- complications arising with post-order implementation and underfunding and insolvency issues
- the impact of the 2016 pension ‘freedom’ reforms
The main action points covered by the report
- When first considering how pensions will be dealt with in a divorce, the fundamental first step is to ensure that all the relevant information is gathered and fairly considered.
- The reasoning behind reaching a settlement or Court order should be documented, so that it is clear what each party is retaining, acquiring, or transferring.
- Parties need to evaluate whether, due to complicating factors, a pension on divorce expert should be instructed. If an expert is required, they need to prove they have the skills required. There is a template letter of instruction provided within the report.
- Factors which parties to a divorce need to be advised clearly on include – the risks relating to a particular pension, the effects of their ages, the benefits which may be lost with pension sharing, and any applicable clawbacks.
- Divorce Solicitors must consider where the pension funds will go upon sharing and whether parties need to seek independent financial advice.
- It is vital to complete pension annexes and Form D81 (Statement of information for a consent order in relation to a financial remedy) correctly. It is also best practice to set out the pre-and post-pension share financial positions and justification for any offset in or with the Form D81.
- Prior to the submission of paperwork for pension attachment orders, approval needs to be gained from the pension Administrator. It is also best practice to get approval for pension sharing orders.
- The timing of the decree absolute needs to be considered in light of the complexity of any pension arrangements.
- Implementation of Court orders must be prompt.
The essential stages of a typical case include:
- gathering information on all of the client’s pensions, using Form P for non-state pension entitlements and completing online requests of the Department for Work and Pensions using forms BR19 and BR20 for state pension entitlements;
- comprehensively considering any complicating issues (there are 26 such issues listed in the report);
- evaluating any valuations obtained, using information regarding employment histories and pension memberships to establish whether the valuations are reasonable; and
- serving copies of applications on pension trustees where required
In most divorce cases, pensions are the most valuable asset behind the family home. This report and the guidance provided will allow family law Solicitors to advise and represent clients more robustly and achieve greater fairness when it comes to dividing pension funds.
Rosie Bracher is a specialist family law firm based in Barnstaple. We have the knowledge and expertise to advise you on all matters involving family law. Please contact our office on 01271 314 904 and arrange to speak to one of our team.