Pensions and divorce

Why pensions matter in divorce

If you're going through a divorce or ending a civil partnership*, how to divide up any pensions you have might be one of the largest financial decisions you need to make.

Pensions are an important asset and it’s important that they are considered at the time of the divorce. However, pensions are often not considered or divided when a divorce happens.

In this article we’ll cover how pensions can be dealt with on divorce. Understanding how this happens can help you if you are going through a divorce.

How pensions are divided during a divorce

What pensions can be divided depends on where in the UK you’re divorcing.

In England and Wales

The total value of the pensions you've each built up, throughout your lifetime, can be taken into account. This means that pensions you or your ex-spouse or civil partner built up before you were married can be considered. This doesn’t mean that pensions from before the date of marriage will be considered but just that they can be.

In Scotland

 Only the value of the pensions you've both built up during your marriage or civil partnership is taken into account. This means that anything built up after your 'date of separation' or before you married or became civil partners doesn't count.

* The rules surrounding dissolution of a civil partnership are the same as those for divorce. We use the term 'divorce' to mean the end of a civil partnership as well as the end of a marriage.

This guide focuses primarily on how 'Pensions and Divorce' work in England and Wales.

How are finances dealt with on divorce?

There's no set formula as to how your assets and income will be divided.
If you end up going to court, they'll seek to achieve fairness. Generally, the starting point is a 50:50 split, but this can be adjusted if it doesn't achieve a fair result. The courts will also look at the needs of children as they always take priority.

Financial settlements must be agreed at the time of the divorce or civil partnership. And pensions must be mentioned as a financial asset.

How are pensions split in a divorce? 

Pensions are not as easy to deal with on divorce as many other assets. If you have a house, it can be sold and the proceeds divided in half. A bank account can be easily divided and transferred to other bank accounts. But pensions are trickier to deal with as, unless the couple are over 55, then they can’t access them. 

Each divorce settlement is different which means that the treatment of any pensions will also be different from case to case.

For divorces after December 2000, pensions can be taken into account in one of three ways:

Pension offsetting

This is the most popular way to deal with pensions on divorce. Under offsetting, the value of any pension is offset against the other assets. If there is a house worth £400,000 and a pension worth £400,000 a couple might decide that one will keep the house and one will keep the pension.

You don’t need to go to court if you chose to offset pensions. However, the pension benefits are valued as a lump sum value in today's terms. A house isn’t going to provide income in retirement unless you can sell it and downsize.

Offsetting isn't possible if there aren't enough non-pension assets.

Pension sharing order

Pension sharing works by splitting the pension benefits at the time of the divorce.

The ex-spouse or partner without the pension receives a share of the pension benefits which are transferred into their name. The person gaining the pension benefits gets a 'pension credit' and the person losing pension benefits gets a 'pension debit'. A pension sharing order will say how much is to go to the person receiving the pension. In England and Wales this will be a percentage of the total pension. In Scotland it will be a monetary amount.

In some cases, the partner receiving the pension credit will be able to choose whether to keep their pension in the existing scheme or whether to transfer it to a new pension. But some pension schemes may not offer both options. The most common time where a transfer to a new pension scheme isn’t allowed is if the person with the pension works in the public sector like the NHS or the Police or armed forces. Instead, the person receiving some of the pension becomes a member of the public sector.

Pension sharing achieves what is known as a 'clean break'. Both you and your ex-spouse or ex civil-partner will know at the time of divorce how much of the pension you'll receive or keep. Death or remarriage of either one of you has no effect on the sharing order.

You'd both pay tax on the pension income you receive from your share of the pension at your own rate of tax.

Why is pension sharing on divorce not more popular?

There are a variety of reasons why people don’t want to choose to pension share on divorce. But often it’s down to the cost and time in going to court to get a pension sharing order.

But making this choice could mean a more comfortable retirement.

Pension attachment order (also known as an Earmarking order)

This is when part or all of a pension owned by one spouse is redirected to the other spouse. This is very rarely used as it doesn’t give a clean break for the parties. The person with the pension agrees to give some income from the pension or a lump sum to the other spouse. The person who owns the pension choses when to access the pension benefit and what it’s invested in.

But the disadvantages of not having a clean break, the whole pension still being owned by the same person and the person receiving pension income having limited rights, mean that this is very uncommon.

Valuing pensions during divorce 

You might know the value of your pension fund if you have a money purchase or defined contribution plan.  But you still need to ask your pension provider to give you what’s known as a cash equivalent transfer value or CETV for divorce purposes.  You normally wouldn't need to pay for this unless you’ve requested one during the previous 12 months or the pension is in payment. Pension providers must give you the CETV within 3 months of the request and it will be valid for the purposes of the divorce for a year. 

Defined contribution pensions 

Valuing pensions is much easier if they are defined contribution pensions, the type of pension where you pay into and, if you have one your employer will pay into. That’s because it easier to see how much the pension is worth as it’s a pot of money. 

Defined benefit pensions 

If you have a defined benefit pension, the type where you are promised a certain amount in retirement based on the number of years you worked and the amount you earned, it’s different and potentially more complicated to value them as there isn’t a pot of money.   Financial advice is crucial if you have a pension like this.  It’s still necessary to request a CETV but there might be fewer options for the person receiving the pension.  For example, if the person with the pension works in the public sector, then it’s normally not possible to transfer a public sector pension to a new plan in the ex-spouse's name.  Their only option might be to become a member of that scheme. 

What happens to your State Pension on divorce?

If you reach State Pension age from 6 April 2016 

State Pension can’t be shared on divorce. But any extra State Pension entitlement you've built up such as an additional State Pension or any protected payment can be subject to a court order. A protected payment is paid on top of the State Pension if you were entitled to a higher amount under the old State Pension rules. 

If you reached State Pension age before 6 April 2016 

Your basic State Pension can’t be shared. But divorced couples can use their ex-spouse’s National Insurance contributions to increase their basic State Pension, without it reducing the other person’s basic State Pension. 

Additional State Pension can be shared if there is a court order. But if the person receiving the additional State Pension remarries or enters another civil partnership then they can lose this right. 

Do I need to take financial advice when I’m getting divorced? 

Some people who haven’t been married very long and aren’t sharing complex assets like pensions might not need to take financial advice. 

However, you will need to take financial advice if you could stay in a defined benefit pension scheme and instead you want to move to a defined contribution pension scheme. That’s because you would be giving up valuable benefits. 

If you are sharing pensions, then financial advice is very important and essential if one or both people in a couple are in the public sector.