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Pensions on divorce: equalisation of income or capital?

Date:10 MAR 2015
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Barrister, arbitrator and mediator
In the Blue ‘equalisation of income in retirement’ Corner we find Coleridge J in RP v RP [2006] EWHC 3409 (Fam), [2007] 1 FLR 2105 and David Salter (sitting as a Deputy High Court Judge) in B v B (Assessment of Assets: Pre-Marital Property) [2012] EWHC 314 (Fam), [2012] 2 FLR 222.

In the Red ‘equalisation of available pension capital now’ Corner we find Mostyn J (albeit extra judicially) stating in the forward to Hay, Hess and Lockett, ‘Pensions on Divorce’, ‘For my part I am firmly in the [equalisation of capital] camp as [this] exercise must surely bring into account the inestimable benefit of actually being alive when the other party is dead! In my book it is an equal outcome for the husband to receive £20,000 annually for 10 years and for his younger wife to receive £10,000 for 20 years. But I acknowledge that my view is not shared by all and we may have to await a decision from a higher court to resolve this issue.’

Nicholas Francis QC, sitting as a deputy High Court Judge, has also recently encamped firmly in the Red Corner in SJ v RA [2014] EWHC 4045 (Fam) at para [83]:

‘The wife says that there should be a pension sharing order to provide her and the husband with an equal income. Given that the wife is younger and female, this would provide her with a greater share of the combined fund values. I would regard such an approach as unfair and anachronistic in a case where assets exceed the parties' needs. The recent well publicised changes to pension regulations will mean that pension investments are virtually to be treated as bank accounts to people over 55, as these parties are. Why should someone receive more just on the basis of gender? There may have been an explanation when rules required the purchase of an annuity. However, to give the wife more than the husband, on account of either age or gender would seem to me to be unacceptable discrimination unless it is a case which is governed solely by needs. If a person should receive more of a pension fund under the modern rules simply because she (or he in the case of a marriage where the husband is much younger) is likely to live longer, then such an approach would logically extend to all capital assets. Moreover, European Union judgments and rules are rapidly outlawing discrimination on account of gender. In cases where distribution is being made on a basis which is not guided by need it is, in my judgment, incorrect to distribute a pension fund on the basis of equality of income and there is no need for actuarial reports in the overwhelming majority of such cases. I should expect courts to be most reluctant in the future, in bigger money cases, to provide permission for actuarial reports on the issue of how to effect equality of income. Moreover, I suspect that annuities will, in the overwhelming majority of cases, become a thing of the past.’
There are a number of comments here which are likely to provoke further debate.

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First, with coming pension reform will some pension funds come to be viewed by the over 55s as ‘virtually’ a bank account? There has been much publicity concerning pension freedoms post April 2015 in this respect, but the learned deputy judge might have overstated the position here. A pension annuity will guarantee an income for life. Some may still opt for an annuity to provide that security. There is also the question of tax on draw down. After the tax free lump sum, the rest will be taxed at the recipient’s marginal rate. If the pension is liquidated in one hit, that may result in a very large tax bill. It might be more accurate to view the pension fund as akin to profit in a company, accessible but with taxation consequences. Some are also suggesting that the internal rules of pension funds may operate to restrict the permissive freedoms granted in the legislation. Time will tell.

Secondly, whilst the comments here are expressly limited to those cases where resources exceed needs, we all know that the concept of needs is very elastic indeed. At the district judge coalface there will be an array of different interpretations as to when needs are said to have been met. My guess is that the approach espoused by Nicholas Francis QC will end up being deployed in some middle money cases where the district judge is persuaded that needs are met.

Thirdly, and following on from the second point, SJ v RA is likely to be routinely cited at the more comfortable end of middle money cases to suggest that an actuarial report is not required.

Lastly, will this judgment effect the manner in which pensions are shown on a schedule of assets? There have been a variety of approaches, from Maskell v Maskell [2001] EWCA Civ 858, [2003] 1 FLR 1138 (treat them differently) to Norris v Norris [2002] EWHC 2996 (Fam), [2003] 1 FLR 1142 and GW v RW (Financial Provision: Departure from Equality) [2003] 2 FLR 108 (lump them with current assets), Martin-Dye v Martin-Dye [2006] EWCA Civ 681, [2006] 2 FLR 901 (it depends) and Vaughan v Vaughan [2007] EWCA Civ 1085, [2008] 1 FLR 1108 (sub total current assets and then grand total all assets including pensions). If the view expressed in SJ v RA prevails then it may well be that there will be a further twist, with presentation of pension assets appearing differently according to the parties’ proximity to age 55.