The recent Pensions Advisory Group report suggests that there are four answers to the “pensions before marriage” question.
We need to be clear on a bit of terminology, however, before looking at the answers.
First, remember that pensions can be shared or divided in any portion. It is over-simplistic and dangerous to assume that the division will be a straight equal split.
Secondly, where a couple moves seamlessly from living together to a marriage or civil partnership, then the whole of the time they spent together is added up. We refer below to the “start valuation date”- this means either the date of your marriage or civil partnership or the date that you started living together, where relevant.
We are often asked if pensions earned before marriage have to be shared.
The answers to that question are summarised in the report as follows - with fuller explanations below:
- yes, share the whole pension
- no, only share a percentage of the pension that equates to the number of years between the start valuation date that coincide with years paid into the pension itself
- no, deduct the historic value of the pension at the start valuation date from the current value and divide what is left
- no, calculate what the historic value was at the start valuation date and then add on increases to allow for inflation and other passive, non-contribution based growth. Then deduct that amount from the current pension value and share what is left
Share the whole pension
This approach becomes more likely the longer the period of marriage or civil partnership – combined, don’t forget, with any added-on period of living together.
The likelihood of this outcome also increases if there are limited other resources to share between the couple; and if the receiving partner can show a need to rely upon all of the pensions earned by the other partner, even those earned before the marriage.
Share a percentage equating to years of marriage and years contributing to the pension
An example will help here; imagine that a couple lived together for five years and were then married for 15. The wife had been paying into a pension for 10 years before the couple moved in together. The husband has no pension.
The couple have been together for a total of 20 years but the wife has been paying into her pension for 30 years.
20 out of 30 years amounts to two-thirds or 66.6%. Therefore, the couple would share two-thirds of the pension and the wife would retain the other third.
This solution can be detrimental to the receiving partner because the value of the wife’s pension contributions in the early years – before the couple were together – might have been far lower than contributions in the later years. As a result the pension-owning partner might be given too much credit for premarital pensions.
Deduct the historic value from the current value
You should be able to obtain the historic value from the date that cohabitation began or the date of the marriage or civil partnership. Deduct this value from the current value and share what is left. This approach is likely to be unfavourable to the pension-holder.
Calculate how much the historic value would have increased by and deduct that figure instead
This option refines the previous approach by recognising that the value of the pension on the start valuation date would have grown by itself simply by the interest being earned or other measures. The inflated figure, once calculated, is then deducted from the pension before sharing. Here the pension-owner gets to retain a little bit more than at 3 above.