Pension Valuation For Divorce Purposes

During divorce, pensions can be one of the largest assets alongside the family home. They can also be one of the hardest to value properly.

For most pensions, the starting point is a cash equivalent, usually shortened to CE. This gives you a useful snapshot, but the figure alone does not always tell you how valuable the pension is in practical terms.

Getting the pension valuation right can reduce the risk of trading away valuable long-term income for short-term capital, particularly where defined benefit, final salary or public sector pensions are involved.

What Is a Pension Valuation for Divorce Purposes?

In England and Wales, pensions held by both spouses will normally be considered alongside property, savings, investments and other assets when a financial settlement is being discussed.

The way a pension is valued depends on the type of scheme involved.

Some pensions have an identifiable pot of money. Others promise future benefits based on salary, length of service and the rules of the scheme.

A valuation gives you the figures. The important part is understanding what those figures mean and whether they give you enough information to make a fair decision about the settlement.

What Does a Cash Equivalent Tell You?

A cash equivalent, or CE, is a figure supplied by a pension scheme representing the value placed on the member’s pension rights.

You may also see the term Cash Equivalent Transfer Value, or CETV, where pension benefits can be transferred. If a pension is already in payment, there may be no transfer value, so cash equivalent is the broader term.

Pension schemes will normally provide one cash equivalent free of charge within a 12-month period. A charge may apply if another valuation is requested during that period.

The type of pension makes a big difference to how useful that figure is.

Defined contribution pensions

A defined contribution pension is built from contributions and investment growth. There is usually an identifiable fund value, although this can rise or fall as investments change.

For many straightforward defined contribution pensions, the current fund value gives a useful picture of what is held.

Defined benefit pensions

Defined benefit and final salary pensions work differently. They provide benefits according to the rules of the scheme rather than simply giving the member access to a pot of money.

These may include:

• guaranteed retirement income
• inflation-linked increases
• survivor benefits
• early or late retirement options
• other scheme-specific benefits

Two defined benefit pensions with similar cash equivalents can still provide very different levels of income in retirement.

Public sector schemes, including NHS pensions, can also need additional analysis because their structure and scheme rules make direct comparisons with property, savings or other pensions more difficult.

When Is a Pension on Divorce Expert (PODE) Needed?

Not every divorce involving pensions requires a specialist report.

Where the arrangements are more complex, a Pension on Divorce Expert, or PODE, can carry out detailed analysis and modelling.

PODE input may be needed where:

• defined benefit or final salary pensions are involved
• public sector pensions form a significant part of the settlement
• several substantial pensions need to be compared
• there is a large difference in pension provision between spouses
• future retirement income needs to be compared
• pension sharing percentages need to be modelled
• a pension is being offset against property, savings or other assets
• pension benefits were built up across different periods of the relationship

How Phil and The Divorce IFA Team Support You

Phil works as a financial neutral and shadow expert, helping clients, solicitors and mediators instruct and analyse PODE reports where specialist pension evidence is required.

Phil and the Divorce IFA team help make sure the right questions are asked at the instruction stage, explain what the report means in practical terms and assess the findings alongside the wider settlement.

That includes looking at pensions alongside property, savings, maintenance, mortgage capacity, tax and longer-term financial needs.

Should the Whole Pension Be Included in a Divorce?

Clients often ask whether pension rights built up before marriage can be kept separate. This is where apportionment can become relevant.

In England and Wales, pension rights built up before marriage are not automatically excluded from a financial settlement. The court can take the whole pension into account, particularly where both parties’ financial needs need to be met.

Apportionment can still provide useful context where substantial pension benefits were built up before the marriage, the marriage was relatively short or there was a long period between separation and settlement.

The calculation is not always as simple as dividing the pension according to years of service. Investment growth, scheme rules and the type of pension can all affect the result.

An apportionment calculation does not automatically ring-fence the pre-marital part of a pension. It helps show how the pension was built up over time so that this can be considered alongside each person’s needs and the wider financial circumstances.

What About the State Pension?

The State Pension should still form part of the overall assessment of each person’s retirement position.

The basic State Pension and new State Pension generally cannot be shared through a Pension Sharing Order. Limited exceptions can apply to certain historic Additional State Pension rights and protected payments.

Even where the State Pension cannot be shared, knowing what each person is likely to receive can help build a more complete picture of their future income.

Pension Valuation and Offsetting

Pension offsetting involves one person keeping more or all of their pension while the other receives a greater share of another asset, such as the family home, savings or investments.

This needs particular care because assets with the same headline value are not automatically financially equivalent.

For example, a £300,000 pension should not automatically be treated as equivalent to £300,000 of equity in the family home.

A property can provide housing and future capital growth, but it also comes with maintenance costs and does not provide the same type of retirement income. A pension may include tax advantages, guarantees and inflation protection.

There is also no single accepted method for calculating a pension offset. Different approaches can produce vastly different answers, so the assumptions behind the proposed trade-off need to be understood before an agreement is reached.

Phil and the Divorce IFA team can analyse what different offsetting approaches mean for your income, assets and longer-term financial position so you understand what you may be gaining and giving up.

Pension Valuation and Pension Sharing

A Pension Sharing Order gives one spouse a percentage of the other spouse’s pension rights and creates pension rights in the recipient’s own name.

How those rights are provided depends on the scheme. With many pensions, the pension credit can be transferred to another pension arrangement. With unfunded public sector schemes, such as the NHS, the pension credit generally remains within the scheme.

The court order specifies a percentage rather than a guaranteed cash amount. Pension values can change between the figures used during negotiations and the value used when the order is implemented, so the cash amount represented by that percentage can change.

Before agreeing the share, it is important to understand what the resulting pension rights could mean for each person’s wider retirement position.

How The Divorce IFA Can Help

A headline pension figure is only part of the financial picture.

Phil and the Divorce IFA team help clients understand pension valuations, compare settlement options and assess how different decisions could affect their income, assets and retirement plans.

Where a PODE report is required, Phil can help shape the instruction, analyse the findings and explain what they mean alongside the rest of the settlement. This gives you a clearer basis for discussing pensions with your solicitor or mediator and making decisions about pension sharing, offsetting or other settlement options.

Once a settlement has been agreed, The Divorce IFA can also provide regulated financial advice on pension sharing implementation, transfers, investments and protection where appropriate.

If you are unsure whether the pension figures you have give you enough information to make a decision, call 0800 092 1229 or complete the form below to speak with the Divorce IFA team.

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