Petra Spirkova, Financial Planning Director at Citywide answers a common question from family lawyers:
“I have two pensions with CETVs of around £600,000. Why is the expert treating them so differently?”
For family practitioners, this is one of the most common and misunderstood issues in financial remedy work.
Pensions are often among the most valuable assets in financial remedy proceedings, yet they remain one of the most misunderstood.
At first glance, they can appear straightforward: a figure on a balance sheet, something that can be divided alongside property and savings.
In reality, pensions behave very differently from other assets. Two pensions showing the same value can produce very different outcomes in retirement.
The key issue is not simply what a pension is worth today, but what it will provide in the future.
Let’s start with the basics
Most clients will have a workplace pension. The first step is to identify whether it is a:
- Defined Contribution (DC) or
- Defined Benefit (DB) arrangement.
Although they may appear similar on a schedule of assets, they operate in fundamentally different ways.
The question is not just the value shown, but what that value represents in practical terms at retirement.
Defined contribution pension – clear value, uncertain outcome
A Defined Contribution (DC) pension is a fund built up through contributions and investment growth.
It has a clear, visible value and is usually straightforward to divide in divorce proceedings.
However, it does not guarantee any level of income. The outcome depends on investment performance, withdrawal decisions and longevity.
This means that while the value looks certain, the future income is not.
Example
A £500,000 DC fund may appear equivalent to £500,000 of housing equity. In practice, however, the pension must generate income – and do so under uncertain conditions – whereas property does not provide a natural income stream.
All personal pensions (PPs) and self-invested personal pensions (SIPPs) are forms of DC arrangements.
In addition, these could also contain an element of safeguarded (protected) benefits such as guaranteed annuity rate (GAR), guaranteed minimum pension (GMP) or Protected Pension Commencement Lump Sum. These are likely to be lost or significantly reduced if benefits are accessed before the scheme’s nominal pension age.
Defined benefit (DB) pension – less obvious, often more valuable
A DB pension provides a guaranteed income for life, often linked to inflation and based on salary and length of service.
These pensions offer a level of security and predictability that is difficult to replicate.
However, the CETV can be misleading. It is a transfer value rather than a true measure of economic benefit.
As a result, DB pensions are often undervalued in divorce settlements when compared directly with DC funds.
Example
Two pensions with a CETV of £600,000 may appear equal. In reality, a DB pension might provide around £25,000 per year of index-linked income, while a DC pension may produce significantly less and carry investment risk.
Public sector and uniformed schemes
Public sector pensions, such as NHS, Teachers’, Police or Armed Forces schemes, are typically defined benefit arrangements.
They are usually inflation-linked and ultimately backed by the Government.
These schemes often provide secure lifetime income together with valuable dependant benefits.
Their CETVs can significantly understate their true value, meaning careful analysis is essential when they form part of a settlement.
The importance of context
Pensions cannot be assessed in isolation. Several factors can materially affect what constitutes a fair outcome.
Age – Differences in age affect when pensions can be, or need to be, accessed and how long they must last. Even a gap of several years can change the balance of fairness.
Health – Where one party has reduced life expectancy, a guaranteed lifetime income may have less practical value. In such cases, flexibility or access to capital may be more appropriate.
Income vs capital – Clients do not retire on capital values. They rely on income.
A focus solely on equalising CETVs can therefore overlook whether both parties will achieve comparable financial security in retirement.
When a PODE is needed
A Pensions on Divorce Expert (PODE) is often valuable where pensions are complex or form a significant part of the overall assets.
This is particularly relevant where:
-
- There is a mix of DC and DB schemes
- Public sector pensions are involved
- Pensions are being offset against property
- There are differences in age or health
In these situations, relying on CETV alone can lead to misleading comparisons and unfair outcomes.
What a PODE adds
A PODE report goes beyond CETV and focuses on outcomes rather than headline values.
It translates pension benefits into comparable retirement income streams, making different schemes easier to assess side by side.
It helps support fair division by recommending pension sharing arrangements based on income equality or individual needs, rather than simply capital values.
It also includes scenario testing, showing how outcomes may vary depending on factors such as inflation, life expectancy and retirement age.
Finally, it provides a critical assessment of CETV, highlighting where transfer values may understate defined benefit pensions or distort negotiations.
A PODE report will also highlight the advantages and disadvantages of sharing pension benefits via various options, such as sharing offsetting or earmarking (earmarking is sometimes called an attachment order, it is often inappropriate due to client circumstances and needs).
A common risk in practice
Cases involving DB schemes, mixed pension types or offsetting are often assumed to be straightforward, but in reality can lead to settlements that appear equal on paper while producing unequal outcomes in practice.
The treatment of pensions in financial remedy cases requires more than a simple comparison of CETVs.
Defined contribution schemes represent capital subject to risk, while defined benefit schemes provide secure, often inflation-linked income.
CETV is a useful tool, but it is not a measure of fairness.
True fairness is achieved by focusing on outcomes, particularly long-term financial security and sustainable retirement income.
Petra Spirkova, Financial Planning Director, Citywide and member of Resolution’s publications committee
