Divorce can be a difficult process at the best of times. Even in relatively straightforward cases, it’s a long and expensive procedure. Lawyers don’t come cheap, and the incidental costs associated with at least one partner finding new accommodation and establishing a new life are unavoidable. This article deals with the complexities of multi-jurisdiction divorce and pensions.
Of course, not all divorces run smoothly; this adds even more to the financial and personal cost of separation. In the international environment, most divorces are complex, even when both parties do their best to cooperate. One partner rarely moves back home whilst the other stays put, perhaps in their home country.
Decisions for multi-jurisdiction divorce and pension
The first decision might be which country will the divorce case be heard in. It doesn’t stop there, though. There could be jointly owned assets situated in a range of jurisdictions.
A typical expat scenario
Mr and Mrs Expat retired in France. Mr is British, and Mrs is French. They own a house in France as well as an apartment in London. They also have bank accounts in both countries and an offshore deposit account in the Isle of Man. An Assurance Vie contract is jointly owned and is based in Ireland. Mr Expat transferred his UK pensions into a Malta QROPS when he moved permanently to France.
They also own a holiday home in Spain to make matters even more complicated. Mr Expat has recently moved to Scotland to live with his new partner.
Valuation of assets for divorce and pensions
Valuing the assets and deciding on the percentage split is relatively easy. In this situation, the main issues concern how to split the QROPS pension plan, local legal procedures to follow and which country to hear the case. This example is good for examining the complexities of multi-jurisdiction divorce and pensions
Pension plans are usually divided according to 3 possible outcomes:
- Defined Contribution (DC) plans are usually subject to a Pension Sharing order where the value of the scheme is split according to a pre-agreed percentage. This may only sometimes be 50/50, depending on the other constituent parts of the divorce settlement.
- Defined Benefit (DB) pensions are more complicated as the cash value changes according to investment market conditions. Indeed, we have seen large falls in DB pension values over the last year due to the rise in interest rates and inflationary pressures on the global economy. This led to a 20% to 40% drop in DB ‘Cash Equivalent Transfer Values’. One way of creating a fair split of a DB scheme would be to use ‘Earmarking’, where the party who owns the pension agrees that the other party is granted a share of the pension income when the normal retirement date is attained. This could be when the pension holder reaches age 65. This method has several potential flaws as it’s impossible to completely eliminate variables such as life expectancy, scheme funding levels and changes to indexation.
- Another option is to use ‘Offsetting’ where the pension may be awarded in full to one party on the understanding that, say, ownership of one of the properties is given to the other. This method works well where there are clear advantages to not having to sell an asset to split the proceeds. Splitting a pension or selling a property would create costs which could be avoided. Pension sharing and offsetting are generally the cleanest ways of splitting pensions.
Divorce has always had emotional aspects; these methods help create certainty and finality. Other big decisions need to be taken before entering into the formal agreement. Preparing before the event is vital as unwelcome surprises delay proceedings and can unfairly skew the asset split to one party.
First, the jurisdiction where the divorce case will be heard must be agreed upon. In this case, there are three options: England, France or Scotland. It’s important to know that Scottish Law often differs from English; this must be considered. Documents must be provided by the court, alongside official translations, which are acceptable by the relevant authorities where the assets are situated.
So, in our scenario above, work needs to be done in advance to know which documents are required by the French, Spanish, Maltese, Irish, English, Scottish and Isle of Man legal systems and tax authorities.
Taxation is one of those potential unwelcome surprises that could appear if dealt with after drawing up the divorce agreement. It’s one thing deciding on the percentage split on any particular asset but another thing entirely when taxation is applied.
If offsetting is used to split a pension, investment account or property, the values could change dramatically during the divorce negotiations. The overall position would change if the property falls in value and the investment account rises.
Every divorce is unique and should be treated as such. There are many potential hurdles to clear, and the situation could be fluid depending on how long it takes and asset valuations.
This is why it’s beneficial to use the services of properly qualified professionals. The Divorce Lawyer must understand cross-border issues. Similarly, appointing a Financial Adviser with experience in multi-jurisdiction planning and who works in various countries is just as important.
The Lawyer can help by researching the legal systems of the countries in which the assets are situated, and the Financial Adviser will be able to deal with the pension, investment, tax and bank accounts. A simple example of where a Financial Adviser can help is by dealing with the QROPS provider so that both parties know the company procedures and Malta’s legal considerations.
In conclusion, being properly prepared saves time and money and reduces the possibility of unwelcome surprises.
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