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Pensions - Is 50/50 always equal?

View profile for Nina Lake
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I am not even going to try and discuss the entire topic of pensions on divorce in one blog article, but instead just touch on one particular issue which I have come across recently. This is what should be considered when all the parties really want is for equality to be achieved and a pension pot is involved…

When a client who is going through a divorce says that they want all of their finances to be split down the middle and for an equal outcome for them and their ex-spouse to be achieved this can in some instances be relatively straightforward. When a pension is involved it is quite normal for the first port of call to be to look at the overall value of the pension asset to decide how this should be split. It may be that simply cutting this in half and sharing it between the parties as a 50/50 split is fair and equal. This is particularly so when, for example, both parties are relatively young and are of similar ages as it is likely that they will both be in a position to continue to build on their respective 50% slice of the pension over the years as they so wish. Although pension assets are still valuable in this sort of scenario, they are not an asset which is immediately accessible and so the income that they would provide a party on retirement is less important than their overall value.

But what about when there is an age difference between the parties and the older party is nearing retirement age, or is already in retirement, whereas the younger party has another, say 15 years, to continue to contribute to a pension pot? Would a 50/50 split of the overall pension value result in an equal outcome?

The answer is probably no! In this situation a 50/50 split of the pension pot could result in the older party suddenly having their retirement income slashed, with little or no time to continue to contribute to their pension pot in order to increase it. On the flip side, the younger party would have a pot which they could continue to contribute to up until retirement, ultimately resulting in them having a much better income than the older party when they do come to retire.

In this situation it is really important to consider what the impact of splitting the pension in half would have on the parties’ income positions. In order to achieve equality it might be that a 50/50 split of the pension pot results in an entirely unequal settlement when income upon retirement is considered.

It is necessary to consider seeking expert advice, possibly through the preparation of an actuary report, in this type of case. This will help show what the impact would be on the older parties’ income if a pension share was agreed or ordered by the Court and it may well be that a 50/50 split does not mean equality.