The flexible friend

Jeff Rooker explores the implications of pension sharing and reflects on previous options

A lawyer is talking to his client.

He says: 'I have some good news and I have some bad news.' The client says: 'I could use some good news.

What is it?' The lawyer replies: 'The good news is that your ex-wife is not making you pay for any money you inherit.' 'That's great,' says the client.

'What's the bad news?' 'The bad news is that she's marrying your father.'

Okay, so it's a bad joke.

But it makes the point that in a divorce, it usually takes at least three people to bash out a settlement: the husband, the wife, and the lawyer.

So, it is vital that family lawyers keep abreast of developments in their field and one of the most important concerns pension sharing and divorce.

I'm sure many solicitors will have already read various articles exhorting couples on the verge of divorcing to rush to file papers before or after 1 December 2000, depending on their personal circumstances.

Some lawyers might even be experiencing a marked increase in clients as a result of the hype that has surrounded the pension-sharing and divorce legislation.

But when you come down to the nuts and bolts, the legal minutiae, how will practitioners of family law be affected by this new legislation?

For the answer, we need to return to 1999, when the Welfare Reform and Pensions Act was passed into law.

The act provided for the courts to order, in the event of divorce or nullity, that the pension entitlements of a couple be shared between them.

Before explaining why the government considered it necessary to introduce this legislation, I should first clarify a few points.

Firstly, it will not be compulsory.

It is up to the couple to decide, with the help of their lawyer, whether pension sharing constitutes the fairest way of dividing their assets.

Secondly, where pension sharing is implemented, this does not necessarily mean that pension rights will be split equally between both parties.

In some cases, a 50:50 split may well be judged the most equitable.

But it should be stressed that pension sharing must be viewed as part of the bigger picture when it comes to dividing assets.

Before December of this year, divorcing couples had only two options when it came to pensions.

In option one, the unpensioned spouse would end up offsetting the value of their share in the pension pot against something else, usually property.

On the plus side, this meant that couples made a clean break with their financial arrangements.

But a large minus was that one spouse could end up with no pension in retirement.

This was less of a problem if the unpensioned spouse could free enough equity from the sale of the property to pay for another, cheaper property and have some cash left over to live on.

But it was still often far from ideal.

In option two, the couple could agree to share the proceeds of the pension when it started paying out.

This process, called 'earmarking', was introduced as part of the Pensions Act 1995.

But it too can have a number of drawbacks.

The problem with earmarking is that no one can predict whether the spouse with pension will outlive the unpensioned ex.

In the event that he or she does not, the dependant spouse could again end up with no income in retirement.

Moreover, a further drawback of earmarking funds in this way is that it necessitates a divorced couple having to keep tabs on each other for the rest of their lives.

As people who see the stressful effects of dealing with a divorce every day, solicitors appreciate how important it is for both parties to move on as swiftly as possible, make a fresh start, and put the past behind them.

Which is where this new legislation comes in.

From 1 December, anyone starting divorce proceedings or applying to have a marriage annulled will be able to share the pension rights as part of the matrimonial settlement.

I know lawyers rarely read anything that does not contain caveats, so let me just offer a reminder that pension sharing will not apply in cases of judicial separation, to cohabiting couples or to same-sex couples.

But this does not mean that every eligible couple has to go down the pension-sharing route.

For example, younger couples with relatively short-lived marriages and only a small amount in their pension funds may well choose to continue offsetting their pension rights against property.

But what this legislation does is give every divorcing couple the maximum flexibility in deciding how best to deal with matrimonial assets during a divorce.

And it helps unpensioned spouses who are getting divorced after many years of marriage to rest secure in the knowledge that they will not have to start from scratch when saving for their retirement.

Also, we have been mindful of keeping the cost of pension sharing down to a minimum, which is an important consideration as it is the divorcing couple themselves who will have to meet the expense.

It is to be hoped that this will all help to make what is a painful process at the best of times as painless as possible.

On current trends, we estimate that there could be as many as 160,000 couples divorcing next year and they will need the help of a lawyer to ensure that they are getting the fairest settlement.

Jeff Rooker is Minister of State for Social Security