Introduction
In terms of value the matrimonial home is usually the largest family asset, however, where there is a long marriage or one or both of the parties is a high earner the value of retirement benefits can be substantial. In most cases of divorce, nullity or judicial separation of marriage the court will have to satisfy the needs of the parties from limited resources.

Where the assets are substantial the principles established in White v White (2000) where the needs of both parties are easily satisfied from a small proportion of the assets, the courts should first consider an equal division of the assets and depart from this conclusion only if there is good reason for doing so.

These principles can also be applied during ancillary relief proceedings relating to pension rights between the parties as shown in the step-by-step guide. Although the courts may start with a 50/50 division of the retirement benefits, other factors set out in section 25 of the Matrimonial Causes Act 1973 (MCA 73) may influence the court to decide on a different division.

There are many types of pensions that can be divided on divorce and the most complex are defined benefit schemes. A defined contribution scheme will be easier to divide between the parties. Both the state basic pension and state earnings related pension scheme (SERPS) can also be divided on divorce although administratively this could take considerably longer to achieve than the other pension arrangements.


Defined benefit scheme
These are the most complex pension arrangements to value on divorce because the benefits at normal pension age (NPA) are based on the number of years of service and the final salary of the scheme member at that time, with no ongoing fund value to work with.

Defined benefit schemes are only provided by employers as part of the occupational pension scheme for the employees of the company and are commonly known as final salary pensions. No funds are specifically accumulated for each individual member, however an actuary must calculate the benefits paid to the members at retirement age and ensure that the pension scheme as a whole has enough money to pay the pension obligations now and in the future.

This means that various actuarial assumptions must be made about inflation, investment return, earnings growth, discretionary benefits, future allowances for career progression and salary increases of members as well as the maturity of the scheme population and the balance between the cash flow received and paid out of the scheme. There are also obligations to meet the minimum funding requirement (MFR) that aims to ensure all defined benefit schemes are not underfunded or have an excessive surplus.

During ancillary relief proceedings the court will in the first instance require the cash equivalent transfer value (CETV) from the provider of the final salary pension. This figure assumes that the member will leave service at the point of valuation that is usually an incorrect assumption and can greatly underestimate the fair value of the members pension rights. This means where the CETV Method is not sufficient, expert evidence may have to be used to determine a suitably adjusted CETV reflecting the circumstances and specific needs of the parties. This can be achieved by pensions expert conducting a pension audit of all the pension arrangements.

Defined benefit schemes have been established from a number of different sources. To attract and retain the best employees most 'blue chip' companies have in the past provided final salary pensions. These have typically been set up with a 1/60th accrual rate and this means that the employees must work for 40 years before they can receive the maximum Inland Revenue benefits of 2/3rds final salary and part commuted to a tax free lump sum.

Public service schemes also offer a final salary pension with an accrual rate of 1/80th plus a tax free lump sum in addition. This means that if the member works for 40 years this arrangement will be equal to the maximum Inland Revenue benefits of 2/3rds final salary. The third type is the Armed Forces Pension Scheme that is governed by prerogative instruments, is also a final salary pension but derives their authority from the Queen rather than by parliament.

Whatever the source of the defined benefit scheme, on divorce the valuation process will be similar and a pensions expert will have to consider the actuarial assumptions of the scheme together with other benefits such as death in service and discretionary benefits to arrive at a fair value, from which the former spouse will receive a percentage applied as an earmarking order or pension sharing order.


Defined contribution scheme
There are a great variety of defined contribution schemes provided by employers or established by individuals as private pensions. The most common employer schemes are group personal pensions (GPP), group stakeholder pensions, occupational money purchase schemes and additional voluntary contribution (AVC) schemes.

For individuals the most common types are personal pensions, stakeholder pensions and retirement annuity policies (RAPs). All of these pension arrangements can be divided by the court on divorce and are much easier to determine their value compared to a defined benefit scheme. This is because the cash equivalent transfer value will usually be an acceptable valuation of the transferable fund from the pension arrangement.

At retirement the spouse can use a pension fund created in their own name with a pension sharing order to buy an annuity and has the option to use an open market option to search for the highest pension annuity. Once you have purchased an annuity it cannot be changed, so learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised annuity quote offering guaranteed rates.

The value of a defined contribution scheme is dependent on the contributions made and the underlying investment growth so the CETV is an accurate value, less any charges, of what the pension is worth. Only an occupational money purchase scheme would be the exception where there may be additional death in service benefits provided by the employer to the employees. It would be the court decisions as to whether the cost of a pension audit could be justified by the value added to the former spouse.


State pensions
On divorce the former spouse (usually the wife) can also consider the members (usually the husband) entitlement to state pensions. Pension sharing can be used for the state earnings related pension scheme whether the benefits have been built up in SERPS in its own right or built up from contracting out of SERPS as protected rights.

The percentage in a pension sharing order determined by the court for the former spouse will also apply to any SERPS benefits. Where the member has contracted out of SERPS either through a contracted out occupational pension scheme or personally taken out an appropriate personal pension (APP) in order to contract out, these benefits will be known as safeguarded rights after pension sharing and subject to the same conditions as other state pensions when it comes to the state pension age.

However, the state basic pension cannot be subject to pension sharing and the former spouse will have to apply directly to the Benefits Agency to amend the members state basic pension and payment of benefits at state pension age.


Financial orders
In practice pension sharing orders and offsetting of retirement benefits against other matrimonial assets will continue to be more popular and useful to the parties than earmarking orders, because they achieve a clean break of the members pension rights. Pension sharing will allow the former spouse a pension credit as a percentage of the fair value of the retirement benefits, the percentage being specified by the court or by agreement between the parties.

This pension credit can be used as an internal transfer to the existing scheme if dual membership is allowed or to another pension arrangement as an external transfer. It will not matter whether the pension arrangement is a defined benefit scheme or a defined contribution scheme as the resulting pension will be in the former spouses own name with no further consequences.

For a money purchase scheme the spouse can at retirement buy an annuity with the option to use an open market option to search for the highest pension annuity, adding all the features necessary such as escalation of income and specifying the period of payment such as monthly or quarterly. Once you have purchased an annuity it cannot be changed, so learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised pension annuities offering guaranteed rates.

An earmarking order is very different from a pension sharing order in that the order will not be implemented until the retirement age of the scheme member.

The earmarking order implemented at that time could be applied as different percentages of the pension income, tax free lump sum or while the member is in service, of the lump sum death benefit and combinations of all of these. Earmarking the lump sum death benefit could be very useful where the former spouse needs to protect maintenance payments while the husband is in service before retirement.


Pensions after divorce
The type of financial order may mean there will be different consequences for the post divorce contributions to pension planning. For a couple where a pension sharing order has been implemented on a particular pension arrangement, no further variation of that order can occur. This means that the former spouse will in his or her own right be the owner of the pension credit and the scheme member will in his or her own right be the owner of the reduced pension benefits.

However, if the member had other pension arrangements on divorce and no orders were made against them, then it is possible an order could be made against them at a later date. It would therefore be in the scheme members interest to stop contributions to these arrangements and contribute to the one that is subject to the pension sharing order. Where an earmarking order exists the scheme member may also decide to stop payments to the earmarked scheme and contribute to a new pension arrangement.

This would deprive the former spouse of a larger pension and this situation could be made worse if the member also defers taking the pension income or tax free lump sum until the Inland Revenue maximum age of 75. Nevertheless earmarking orders can be varied in the future if the circumstances change and benefits increased in favour of the former spouse.