UK – LONDON: PENSIONS Trends and Developments Contributed by: Beverley Morris, HCR Law
Pensions on Divorce – Confusing Terminology and the Difficulties With Approach It does seem remarkable to reflect on the fact that prior to 1996 the courts had no powers, on a divorce, to share or directly attack the pension rights held by one or both parties. In 1996, pension earmarking was introduced. This meant that if Harry, now retired and receiving an annual net pension of GBP60,000 as a member of the Armed Forces Pension Scheme, divorced Sally, the scheme could be ordered to pay her, for example, 50% of the pension in payment. This solution, however, offered only limited protection. If Harry died before Sally, the payments to her would cease entirely, leaving her financially vulnerable. From December 2000, the law developed further to allow pension sharing. A pension sharing order over Harry’s Armed Forces pension could divert 50% of the pension income to Sally for the rest of her life. Crucially, this entitlement would be independent of Harry’s and would therefore continue even if Harry predeceased her. Do people understand pensions? Before considering what a pension actually is, and why this matters on divorce, it is worth noting that evidence suggests far fewer pension sharing orders are made on divorce than would be expected – par ‑ ticularly given that pensions are often the largest and most valuable asset in the marital finances. This appears to stem from a widespread lack of under ‑ standing about how pensions operate. Some research also indicates that divorcing couples often believe that a pension “belongs” to the spouse who contributed to it. What is a pension and why does it matter? On divorce, the category into which an asset falls may determine how that asset is treated. In broad terms:
• matrimonial capital assets are usually shared between the parties as of right (regardless of need); whereas • income is not shared as of right – maintenance is paid from income only where there is a demon ‑ strated need. So into which category does a pension fall? Is there a clear definition of a pension? The simple answer is no. There is no statutory defini ‑ tion in the legislation governing pension treatment on divorce. Judges have expressed differing views about what a pension actually represents. Pensions can generate capital (such as tax‑free lump sums) and income (for example, through annuities). They are often complex assets with features that set them apart from ordinary capital or income streams. Dictionary definitions provide only limited guidance. Cambridge Dictionary: “An amount of money paid regularly by the govern - ment or a private company to a person who does not work anymore because they are too old or have become ill.” Oxford Dictionary: “An amount of money paid regularly by a government or company to somebody who has retired from work.” Do court decisions provide clarity on how pensions should be treated? In short, no. Judges have long recognised that pensions do not comfortably fit into either the capital or income cat ‑ egory. This is because pensions often offer options beyond a simple income stream. Complications increased after reforms introduced by the Taxation of Pensions Act 2014, which from 6 April 2015 allowed members of defined contribution
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