Fiona Reddan: Dividing up the pension pot when a marriage breaks down

When a marriage falls apart, sharing the family assets is a necessary but sometimes emotional and complicated task. Often, the family home or savings and investments will take centre stage; however, the couple’s pensions may be the biggest asset in the marital pot, and due care needs to be taken when considering their division.

Marriage breakdown

Divorce figures have been on the rise of late, and there was an 11 per cent increase in the number of applications for 2021 – 5,856 compared with 5,266 in 2020.

However, time will tell whether or not this was caused by an artificial bounce due to the reduction in time required to be separated before a divorce can be agreed from four years to two. After all, the numbers seeking a judicial separation actually fell by 13.5 per cent to 550 in 2021, according to figures from the Courts Service.

Divorce or separation typically requires a sharing of assets, which can be a tricky time – but this doesn’t mean that due consideration should not be given to pensions, which can make the process that little bit more complicated.

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“It will be one of the assets that’s been considered, such as the family house, savings, other investments and pension,” says Sinéad Cullen, a private client manager with NFP, adding, “It’s the forgotten asset”.

Austin Garvey, senior financial adviser with NFP, agrees. “It sits in the background a little bit, people have the tangibles and the intangibles and the pension is in between.”

But given that pensions can be very, very valuable, it may be necessary to bring them front and centre of any separation negotiation.

What is a PAO?

In order for the benefits in a pension to be shared, the court must serve a binding order known as a pension adjustment order (PAO), which requires a proportion of the benefits to be paid to the other spouse. A PAO can be served on any type of pension plan, such as occupational pension schemes, including additional voluntary contributions (AVCs); a personal retirement savings account (PRSA); personal pensions; and buyout bonds (BOBs).

For Marion Campbell, a family law solicitor with KOD Lyons, PAOs are “complicated and very problematic”.

The complexity of PAOs is partly due to the fact that the value of a pension is not always obvious, particularly if retirement is still some time away, given the potential for its value to increase.

“So often couples come in and say ‘we’ll keep our own pensions’, but they do this without knowing what’s in the value of the pensions,” says Campbell.

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“It can be a very, very valuable asset,” she says, adding that you need to appoint the experts to assess the value. “You have to instruct an actuary to do a valuation.”

Back in the financial crisis, Campbell recalls that the couples with the most valuable assets were often those where one of them worked in the public sector, such as teachers or doctors.

“Teachers would come in who were separating from their husbands who had properties, but the most valuable asset in that pot was the teacher’s pension,” she says.

Another complicating factor is that separate PAOs are required for each personal pension and, given modern working habits, having several pensions with different employers is no longer unusual.

“If there are six or seven pensions, then you have to serve notice by registered post on every single administrator,” says Campbell.

Who gets what?

It’s not always the biggest earner who will have to hand over their pension – the value of the pension will be considered as part of the overall division of assets, with the aim being that everyone is fairly provided for after the split.

Typically, a PAO will contain two important pieces of information: a specified time span which is covered by the PAO and a percentage of the value of the pension that will be granted to the other spouse.

For example, if the PAO covers the period of marriage from January 1st, 2010, to January 1st, 2023, and the specified percentage is 50 per cent, then the spouse will get half of the retirement benefits accrued during this period.

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There can be an expectation that there will be a 50:50 division of assets but, as Campbell notes, there is no provision for this in Irish law, and says it’s rather a case of ensuring “proper provision” for both spouses.

While a PAO can be made subject to future variations, which means that it can be changed at some point in the future, typically this doesn’t happen, says Cullen. Once the deal is done, it’s done.

It is also possible to get a “nil” PAO. This means that the other party has no entitlement (or maybe just 0.001 per cent) of the other spouse’s pension. It may be used as part of the overall separation of assets, as an equitable division of assets may mean that a spouse will be entitled to a percentage of one pension but they won’t be entitled to a percentage of another, hence the “nil” PAO.

When there is a nil PAO, it means that the pension cannot be adjusted at a later date.

Wait or transfer now?

When it comes to a PAO, while the rights to a certain amount of a pension may be assigned to a spouse today, this person won’t actually be entitled to any benefits until the spouse who owns the pension retires.

There are downsides to this approach as it means firstly, in the case of a defined contribution (DC) pension, waiting until the former spouse to retire (other types of pensions such as BOBs can be accessed from the age of 50 of the spouse who owns the pension).

Consider a couple, Siobhán and James. James is getting a proportion of the benefits in his higher-earning spouses’s pension but if he doesn’t do anything, he will have to wait until she turns 65 to access his share, even though he is older than her.

In addition, it means that the spouse will be dependent on their investment expertise or otherwise, and will have no input into how the pension is being invested/performing.

To get around this, there is an option of transferring the benefits to their own fund.

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Cullen typically recommends that spouses getting the benefit of the PAO should consider transferring it to their own pension fund, be it a PRSA, a BOB or their own occupational fund.

“If you get a PAO the best thing is to separate them completely,” she says.

But it may also depend on the type of pension at play. If the spouse has a defined benefit (DB) pension fund for example, accessing the benefits now may result in an ultimately lower benefit, depending on the transfer value, than if they had waited until the spouse had retired.

When it comes to drawing down the pension, Cullen says both spouses will be entitled to their own €200,000 tax-free lump sum, plus a further €300,000 charged at 20 per cent, when retiring their pension benefits.

Something to note, and which is only of interest really to particularly high earners, is when it comes to the standard fund threshold, which stands at €2 million. Once a pension fund surpasses this limit, a “chargeable excess” – or income tax at the higher rate – applies.

What might surprise however, is that even if a pension fund is diluted by virtue of a PAO, the new, smaller fund may still be deemed to have exceeded this threshold, so care needs to be taken when managing a pension fund that may have been close to the €2 million threshold before the PAO.

As such, it can be important not just to rely on advice from a solicitor when it comes to pensions.

“Have your solicitor and a financial adviser talk to each other,” says Garvey, “as solicitors often don’t know all the ever-changing pension rules.”

Contingent benefits

Another important part of PAO discussions is around the area of contingent benefits as pensions carry additional benefits, such as death in service, which offers a lump sum to the next of kin if the person dies while in employment.

“This can be hugely critical in the case of dependent children,” says Campbell, noting that a typical negotiation would be to ensure, in such an event, that a lump sum would be paid out to the former spouse, which would be equivalent to the missed maintenance payments in future years.

Campbell now frequently sees couples in their late 40s to early 50s separating, both of whom may have good careers and both will decide to keep their own pensions. However, they will give the contingent benefit in the event of the other’s death to the other spouse, during the depenfdency of their children.

Retirement

In the event that the spouses have already retired, then the court will not seek to appoint a PAO. Rather, it will be split via a property adjustment order.

However, Campbell notes that what can be problematic for older couples – and women in particular – is when the couple have already retired, and the man may have drawn down the tax-free lump sum, leaving only a limited income to be shared by way of a property adjustment order.