Personal finance: For better, not worse

Dividing pension funds when a marriage ends is getting easier

WHEN you are standing at the altar and promise to love and honour - for richer and poorer - your main thought in not likely to be your spouse's pension fund. Nevertheless, with one in three marriages ending in divorce, financial settlements are big business.

So what part do pensions playin this? Many people think of a home as the main asset when dividing the spoils at divorce. Surprisingly, a home's value can often be outweighed by accumulated pension benefits.

The Matrimonial Causes Act 1973 specified the importance of taking account of the pension rights of the couple when considering the divorce settlement. The problem was that pensions were seen as difficult to understand. The value of the pension needed to be calculated using actuarial assumptions, which usually resulted in the opposing sides coming up with radically different proposals depending on the assumptions used.

Another concern was that although a value of the pension could be identified, it was not possible to cash it in at the time and therefore other assets had to be offset against it. This often resulted in one spouse walking away pension-rich but cash-poor and the other with adequate money on deposit but little or no pension provision.

In 1995 the Pensions Act was introduced which included a second option for pensions and this affected divorce cases petitioned after July 1996. The major point involved "earmarking", where a portion of the spouse's pension would be paid to the former spouse at retirement, whether in the form of pension, cash sum or both.

However, there were problems. Earmarking a pension would be done by the courts and would specify a fixed amount rather than a percentage, as you could only reasonably apply the order to amounts accrued to date, rather than in the future.

For "money purchase" schemes (either personal pensions or occupational schemes based on the level of contribution) this is not too much of a problem. The value of the fund is clearly visible and can be easily projected to retirement.

Final salary schemes (the more traditional type of occupational scheme) are a headache, as drawn-out calculations need to be made to identify their perceived current value.

Providing calculations are agreed upon, the court can instruct the pension scheme to earmark a certain amount of pension or cash sum for the spouse. However, the beneficiary must wait until their former spouse retires before it can be paid, which may mean two people who cannot bear the sight of each other being linked financially for decades.

The legislation did allow for amounts to be varied in the future in such circumstances, although that would involve a return for both parties to court at that later date.

If the arrangements are based on the pension as a form of income rather than lump sum, problems would also be encountered if something were to happen to the former spouse before retirement.

Basically, all rights to that pension (not lump sum) die with the member, a justification for life insurance if ever there was one, so that if you were entitled to an earmarked pension you would be wise to keep an eye on your ex-spouse's health. The arrangement also vanishes if you remarry, even if that subsequently ends in divorce.

Arranging life cover on your former spouse is not without its own difficulties, as most policies require the subject's authorisation and medical details in order to set the contract up.

Further changes are afoot to introduce "pension splitting", which should be launched next year and is eagerly anticipated by many. Splitting a pension is seen as the ideal option, as it is planned that the identified sum would be separated at the time of the divorce and a "pot" created in the other spouse's name. However, to administer the proposed splits, schemes and insurance companies will require considerable alterations to their systems, rumoured to take up to four years to establish. It may be an attractive alternative, but time is needed to get the requisite legislation right.