Splitting assets during a divorce or civil partnership dissolution can be complex, especially when it comes to pensions. Whether you hold a Defined Benefit (DB or Final Salary) or Defined Contribution (DC) scheme, your pension is likely one of the most valuable financial assets you own. Understanding how the Cash Equivalent Transfer Value (CETV) works is essential for ensuring a fair and informed settlement.
The CETV provides a lump sum value that reflects the worth of your pension benefits. Your pension scheme administrator completes this calculation. This value plays a crucial role when deciding how to split pension assets during divorce proceedings.
We will explain why full pension disclosure is essential, how to approach a CETV-based agreement with your ex-partner, and how an Independent Financial Adviser (IFA) can guide you through the process.
Before we dive in, watch this short video to better understand the importance of full disclosure and fair negotiation when splitting pensions during a divorce: You can also visit our YouTube Channel where we have hundreds of other educational videos.
Why It Is Important Always to Disclose Your Pension Asset
It is vital for couples always to disclose their pension asset and pension income when considering their divorce settlement. This is because pensions are valuable assets that can impact the overall financial settlement, and it is important to ensure that each partner is aware of their rights and responsibilities regarding the pension. Furthermore, pensions are not always easy to value and understand, so it is crucial to get professional advice from a regulated IFA when considering a CETV divorce settlement.
Making Civil Partnership Agreement
Making an agreement with your partner to split your pension arrangements in divorce can be a challenging process. As such, it's important to understand the Cash Equivalent Transfer Value (CETV) element itself. This is an assessment of the value of the pension and is based on the pension scheme's rules. The value will be set by the pension provider and can can not be negotiated.
To make an agreement, both parties need to understand the CETV figure and its implications on a pension. The CETV figure will consider any benefits such as life assurance, ill health, life expectancy and death in service benefits. It is essential to consider the CETV figure carefully, as it can impact the outcome of the pension split.
Additionally, it is also important to consider any additional costs associated with the pension split. These can include legal fees, valuation fees and any financial advice costs. It is worth seeking professional advice from an IFA to ensure the pension split is fair and legally binding.
CETV Options During Divorce
Typically, there are three options that you can do on your CETV: offsetting, pension-sharing, and earn making. Let's discuss them in more detail.
Offsetting
As a starting point, offsetting is a way for both parties in a divorce to retain their pensions while still being able to divide the value of their assets fairly. In this case, both parties offset the value of their pensions against other assets of similar value, such as money or real estate.
This approach takes the pension value into account during the asset division. However, neither party has to give up their pension. This is a fair way to split assets, as it allows both parties to retain their pensions while ensuring that each party receives equal property and assets in the divorce.
Pension Sharing
In pension sharing, the court will decide how to divide an individual's pension benefits if they are going through a divorce. This involves splitting the pension into two separate pensions. This means both parties can access their share of the pension funds after the split.
The CETV will consider factors such as age, length of service and type of pension plan. These factors help determine how much of the pension each party receives. The court order will finalise this in a pension sharing order, resulting in completely separate and independent pension benefits.
Earmarking
Earmarking or pension attachment is a process that allows a portion of a person's pension to be paid to their ex-spouse upon retirement. Earmarking is done to maintain a connection between the two parties and ensure that the ex-spouse receives their share of the pension.
This is typically done as part of a spouse or civil partner divorce settlement. The amount that is paid to the ex-spouse is determined by the court. Typically, this is based on the length of the marriage and the number of assets jointly accumulated during the marriage. This type of payment ensures that both parties are still able to benefit financially from the pension, even after the divorce.
How an IFA Can Help You
When considering splitting a pension pot in a divorce, it is vital for couples to understand the implications of their CETV. It is important to seek professional advice to ensure the pension split is fair and legally binding.
If you’re facing a divorce and need expert help navigating your pension’s CETV, speak to our qualified, FCA-regulated IFAs today.
Book your free initial consultation to understand your options and ensure a fair, legally binding pension split. Contact us now to take control of your financial future.