Divorce and pensions
Last updated 15 February 2016
Pensions are an important asset and will be considered as part of the overall financial settlement you and your spouse reach.
If you are going through a divorce*, how to divide up any pensions will usually be one of the largest financial decisions you need to make. This guide covers the law in England and Wales.
Financial agreements and divorce
There is no set formula as to how your assets and income will be divided between you and your spouse.
If you end up going to court, the court will 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.
Each divorce settlement is different which means that the treatment of any pensions will also be different from case to case. In some cases they could be ignored altogether if both parties have their own pensions.
For divorces that started after December 2000, pensions can be taken into account in one of three different ways:
- pension sharing.
Under offsetting the value of any pension is offset against the other assets. So the party with the pension will keep the pension and the other party will receive a greater share of the other assets in return. The pension benefits are valued as a lump sum value in today's terms.
Offsetting is not feasible if there are not enough non-pension assets.
Earmarking (also called a pensions attachment order) works by allowing the party without the pension to receive income and/or lump sum payments from the pension in the future. The pension benefits are said to be 'earmarked' for their benefit.
The court can also order that some or all of any survivor pension and/or lump sum death benefits must be paid to the party without a pension should the pension scheme member die.
There are some disadvantages to earmarking if you're the party without the pension:
- You must wait until your spouse retires or dies to receive your earmarked benefits.
- You'll have no control over the investment decisions your spouse takes.
- If your ex-spouse retires early or stops contributing to the pension you may receive less than you expected.
- If you re-marry or your ex-spouse dies, you may lose your right to a future pension.
- The original pension scheme member still pays tax on the whole pension income paid by the scheme, even if some of the income is received by their spouse. The party with the pension earmarked for them pays no further tax, but the income will have already been taxed at their ex-spouse's rate of tax which may be higher than theirs.
Pension sharing works by splitting the pension benefits at the time of the divorce.
The party without the pension receives a share of the pension benefits which are transferred into their name. The party gaining the pension benefits gets a 'pension credit' and the party losing pension benefits gets a 'pension debit'.
In some cases the party 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.
Pension sharing achieves what is known as a 'clean break'. Both you and your spouse will know at the time of divorce how much of the pension you will receive or keep. Death or remarriage of either party has no effect on the sharing order.
Each party pays tax on the pension income they receive from their share of the pension at their own rate of tax.
State Pensions and divorce
Your basic State Pension can't be shared if you divorce. However, under the current rules, if one of you has paid enough National Insurance contributions, this could increase the State Pension the other gets providing they do not remarry or enter a civil partnership before they reach their State Pensoin age.
If you have an additional State Pension, you may have to share this with your ex-partner. But if they later remarry or enter a civil partnership they could lose this right.
From 6 April 2016 onwards, neither the old basic State Pension nor the new State Pension can be shared. But if you get divorced and the court issues a 'pension sharing order' you or your ex-artner may have to share any extra state pension entitlement you have built up such as an additioanl State Pension or any protected payment.
The Pensions Advisory Service is an independent organisation that provides guidance on pensions.
Resolution is an organisation of family law specialists.
You should always take financial advice if your divorce involves dividing pension rights as this is a complicated area.
*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.