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Should I be seeking equality of income or equality of capital upon my Divorce?

Pensions are often one of the most valuable assets a couple has and therefore, taking the necessary advice from specialists is vital to ensure a fair division of assets upon the breakdown of a marriage.

In financial remedy proceedings, the issue of pensions is one that can often result in confusion for the parties, due to the funds within a pension being seen differently by the Court to any additional capital that is held, such as investments or properties.

If a Pension Sharing Order is agreed or made by the Court, there are two ways in which pensions can be divided upon divorce:

The first involves division of the value of the schemes, to ensure both parties’ pensions have equal values. This would not necessarily mean that both parties will receive equal income upon retirement, as this is impacted by a number of variables including the parties’ ages and the type of scheme held. The second method involves dividing the value of a scheme to produce equality of income, resulting in both parties receiving equal income from their pension schemes at retirement.

In the recent case of W v H (divorce financial remedies) [2020] EWFC B10, HHJ Hess highlighted that in a ‘needs-based’ case where the parties are close to retirement age and defined benefit schemes are involved, equal sharing of pension income is likely to be more appropriate than the sharing of capital. A ‘needs-based’ case is where the assets available between the parties do not exceed their needs and therefore, the Court will determine the financial settlement strictly on the needs of the parties. HHJ Hess acknowledged that there is no ‘one size fits all’ solution to the sharing of pensions.

This case entrenches the importance of including all pensions accrued prior to the marriage in financial disclosure. The Court can then exercise discretion as to what proportion of any pre-martial pension can or should be excluded.
It is often the case that equality of income is the most appropriate way to divide benefits fairly upon separation however, the associated ages of the parties must always be considered. Equality of income is often the fairest way to share pension schemes when there has been a long marriage.

Equality of capital is likely to be more appropriate for younger couples aged 40 and under, as it is more difficult to calculate future income when there is a longer period to retirement. Equality of capital may also be relevant in cases where all the pensions in question are Defined Contribution Schemes, therefore providing no guarantees as to annuity rates or profits.

The above leads to various questions, such as whether pre or post martial contributions should be included and whether a Pension Sharing Report is required. We regularly work with Pensions on Divorce Experts and can point you in the right direction in this regard. If you have any queries, please click here or email the family team at family@bpe.co.uk.

These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.

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