Pensions are often one of the largest assets that need to be divided in a divorce. In the UK the average married couple’s pension pot is valued at £123,000 and yet in 71% of divorce settlements, pensions are not ever discussed.
Pensions, like any other marital asset under UK law, should be split 50/50 in a divorce. Pensions are normally split in one of 3 ways: by using a Pension Sharing order, by offsetting the value of the pension against other assets or using a Pension Attachment order.
This post is designed to help you understand what happens to pensions in a divorce. What are your rights and how do you ensure a fair financial settlement in your divorce?
What the law says about pensions in a divorce
Your pension, after your home, is likely to be one of the biggest financial assets you will need to divide if you are getting divorced and like any other marital asset can be divided as part of your divorce settlement.
Pensions that can be divided include:
- Personal pension scheme
- Schemes you have through work
- Additional State Pension (but not the basic State Pension)
What rights do you have?
Surprisingly, for divorcing couples who do not go to court there is no automatic right to know a spouse’s pension value at divorce. so you will need to request this information during the mediation process. It is important to ensure that all pension pots are disclosed. Remember, there may be valuable pension pots from previous employers that need to be taken into consideration.
You can find out how much your pension is worth by requesting a Cash Equivalent Value from your pension scheme administrator.
The importance of discussing your pensions in divorce
It’s vitally important for your future wealth and financial stability to discuss your pensions during your divorce. Failure to do so is leaving many divorcees financially worse off, and it’s women who are being hit hardest by this. Research shows that divorced women are losing out on £5bn a year in pension payments. Plus, in a survey by Scottish widows, 40% of divorced women believe their retirement prospects worsened because of divorce compared to just 19% of divorced men.
Try our Pension Divorce Calculator to see what you might be entitled to in a Divorce.
Options for Dividing Pension Assets
- Pension Sharing order
- Pension Offsetting
- Pension Attachment order or Pension Earmarking
It’s important to understand that under a pension sharing order the money needs to be moved into another pension.
Money held within a pension cannot be accessed until you are 55.
1) Pension Sharing
The court may award you a percentage of your former partner’s pension pot. This money is then legally treated as yours. It will either be transferred into a pension in your name or you can join your ex-partner’s pension scheme.
If the pension is transferred to you and you don’t already have your own pension, you’ll have to set one up.
Find out more about pension sharing in our pension sharing orders post.
Deferred Pension Sharing (not available in Scotland)
If you are sharing your ex-partner’s pension and they have retired but you haven’t and are too young to be paid a pension the court may issue a deferred pension sharing order.
You both make an agreement to share the pension at a later date. This can be more complicated to arrange than an ordinary pension sharing order, so legal costs can be higher.
Deferred Lump Sum (not available in Scotland)
You get a lump sum payment from your ex-partner’s pension when they retire.
2) Pension Offsetting
The value of the pension is offset against other assets – i.e. you keep the home and your former partner keeps the pension. If you opt for this kind of arrangement it is important that you consider how you will fund your retirement. You may not want or be able to rely on equity in your property to provide you with a comfortable amount in retirement.
It is important to seek financial advice before agreeing to this kind of arrangement.
3) Pension Attachment order or Pension Earmarking
This is like a maintenance payment where some of your pension is paid directly from your pension pot to your former partner.
Under this arrangement, money from your tax-free lump sum can also go to your former spouse or civil partner. You cannot receive any money until your former partner starts taking their pension. These kinds of arrangement are becoming less popular – courts tend to prefer newer Pension Sharing orders as they allow for financial independence for both parties.
Understand the different Pension Rules in the UK
The way your pension can be divided is the same regardless of where you live in the UK but the rules for how the settlement is calculated are different if you are divorcing or dissolving your civil partnership in Scotland.
In England, Wales or Northern Ireland
The total value of the pensions you have each built up is taken into account. This means not just the pensions that you or your ex-partner built up while you were married or in a civil partnership, but all of your pensions – except the basic State Pension, even if they were accrued before the marriage.
Only the value of the pensions you have 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.
Try our Pensions in Divorce Calculator to see what you might be entitled to in a Divorce.
Dealing with Multiple Pension Pots in Divorce
It’s highly likely that one or both partners may have multiple pension pots that they’ve built up under different employers.
If you have multiple pension pots involved in your divorce then the value of the pots will be calculated and the amount split between the two parties. You may keep some or all of your pension pots or they may be handed
- Finding them – you can use the free government pension tracing serviceto locate missing or old pensions
- Valuing them – Getting estimates of your pension pots value
Understanding Protected benefits and guarantees
It’s important that you understand whether your pension/s have any protected benefits of guarantees such as protected early retirement age, guaranteed annuity rate or other valuable benefits attached to it. If you have one of these pensions you will want to protect these valuable benefits as they may be lost by transferring.
If your partner has one of these pensions you will want to make sure that the true value of the pension has been disclosed – for instance a Final Salary Pension with a guaranteed income for life and a protected early retirement age may have a much larger ‘real’ value than it’s cash equivalent value may suggest (learn how to protect your pension in a divorce).