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Pensions in International Divorce: What To Look Out For
Date: 27/02/2024 Type: Articles Topic: Private Client | Trusts | Wills and Estates | Inheritance | Next Generation Wealth | Investment and HNWI’s | Tax |Is your client going through a divorce in a foreign jurisdiction but they or their spouse has an English pension? Or are they contemplating divorcing in England but have foreign pensions? This area has potential trips and pitfalls so it is important you identify this early and consider the implications ideally before the divorce is even issued.
Foreign divorces where there is an English pension
Your client might now be living in another jurisdiction, but has spent considerable time in England, during which period they built up an English pension. The English pension could even be the only asset that the couple still own in England, meaning they might be prone to forget about it in the context of their divorce, but it is important to cover off this area with them in initial discussions.
An English pension cannot be shared without an English court pension sharing order, or “PSO”. A foreign court order that says that all pensions in a divorce should be shared will not be applicable to, or enforceable against, an English pension. If a divorce is completed abroad and the parties have a foreign court order dealing with the finances associated with that divorce, it is therefore required that they also get an English PSO. The only way to do this is to make an application to the English courts under Part III of the Matrimonial and Family Proceedings Act 1984, commonly known as a “Part III claim”. This law enables the English court to review a foreign financial order associated with divorce, and possibly provide further financial provision to the applicant above and beyond the foreign order.
The criteria to qualify for a Part III claim is that the divorce in the other jurisdiction was legally valid; the applicant has not remarried since that divorce; and that there is a “sufficient connection” with England. Parties will have a “sufficient connection” if either of them are domiciled in England and Wales (and were so at the time of the foreign divorce), or if either of them have been habitually resident in England and Wales for a year before the Part III claim is made.
Prior to Brexit, there was an additional limb of the “sufficient connection” test that enabled you to alternatively qualify under Article 7 of the Maintenance Regulation (Council Regulation (EC) no 4/2009). Article 7 is called the “Forum Necessitatis’” limb. Essentially this allowed for England to secure jurisdiction for a Part III claim, on an exceptional basis, if no court of any other EU country has jurisdiction on any other ground. This made applications under Part III for an English PSO possible for parties who were non-EU nationals, resident outside of the EU, and with no connection to England other than the presence of the pension.
This "Forum Necessitatis" jurisdiction option was removed by regulation 5 of The Jurisdiction, Judgments and Applicable Law (Amendment) (EU Exit) Regulations 2020. This means that, if neither party are domiciled or habitually resident in England or Wales, they will not be able to secure an English PSO, and the English pension will remain with the person whose name it is in.
If your client is looking at entering foreign divorce proceedings but either party has an English pension, ensure they seek clarification on whether or not they will be able to get an English PSO, ideally before issuing their application and especially if the pension in question is one of the largest assets. It might be that they will need to consider whether that jurisdiction is the best place to issue proceedings.
English divorces where there is an overseas pension
The issue is equally problematic the other way around. The case of Goyal v Goyal [2016] EWFC 50 looked at whether English pension sharing orders can be made in relation to overseas pensions. In that case, the husband had a spread betting addiction and had dissipated nearly all the marital assets, leaving just a pension that he had transferred into an Indian annuity policy. He made the case that the court could not make an order against that pension. Mr Justice Mostyn ultimately agreed with him, determining that such an order would violate the presumption against the extra-territorial effect of statute. As a result, whether a pension has always been held offshore or has been moved offshore during the marriage, a PSO is not available.
If a couple agree to split an overseas pension, and the country in which it is based will give effect to this, the agreement can be incorporated into an English consent order, supported by undertakings from both parties. Without the parties’ agreement, however, the court is left with blunt tools as alternatives to assist with redressing the absence of the overseas pension from the marital pot, such as a periodical payments order (with its quantum set by reference to the amounts received from the pension) or a lump sum order (if capital can be withdrawn from the pension).
Seek foreign advice as to whether the country in which the pension is based will give effect to an agreement between the parties to transfer the overseas pension, or if a mirror order will be required in that jurisdiction to deal with the asset (as is the case in England and Wales). If the latter, check if the parties will meet any jurisdictional requirements for an application to be made there.
What if it’s too late and proceedings are underway?
If proceedings are already underway, or if in early advice a lawyer has confirmed that it will be difficult for the parties to get an English PSO or a foreign mirror order, the parties must consider “off-setting” the value of the pension elsewhere in the divorce settlement, or asking the court to do so. Offsetting is where parties account for the fact that the pension is out of scope of any financial order by granting a higher share of other assets to the non-pension holding spouse. It is best that this forms part of the settlement negotiation from the outset and input will be needed from a pension expert.
The pension expert will seek to provide the most accurate calculations of the value that should be attributed to the out-of-scope pension, though these are still not perfect. Pension experts advise that Cash Equivalent Transfer Values (CETVs) are inappropriate for valuing pensions for offsetting, and cannot be used at all if the pension in question is a defined benefit pension. When considering offsetting a defined contributed pension, an adjustment to the CETV needs to be made for (1) tax and (2) “utility”. The tax adjustment is because a fund of £10,000 of cash can be converted into a pension fund of £12,500 after basic rate tax relief. There is some consensus that the adjustment should be 15% if the pension-holder will be a basic rate taxpayer in retirement, or 30% if they are forecast to be a higher rate taxpayer in retirement, but the expert will have to analyse the pension’s small-print. The (optional) “utility” adjustment is for the fact that cash is more flexible, accessible, and liquid than monies in a pension fund. Any adjustment for utility depends on the specific facts of the case, and the Pension Advisory Group’s anecdotal observation is that in many cases pensions appear to have been drastically over-adjusted for perceived utility. For example, if the non-pension capital being offered in the off-set is equity in the family home, and this meets a basic housing need, it could be argued that such an asset is almost equally as illiquid as a pension fund, so the utility adjustment should be very small.
Conclusion
Clients do not want to have gone through their whole divorce settlement negotiation acting on the assumption that a pension would be shared, only to discover that it will not be possible legally. If your clients are separating and you are aware that international pension issues may apply, encourage them to take advice at the outset.
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Author
Kate Pooler - Edwards Family Law
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