Pensions are often one of the most valuable assets in a divorce, second only to the family home. Therefore, any existing pensions should be a key consideration in any financial settlement, should you be facing the prospect of a divorce or a dissolution of civil partnership.
It’s common for one spouse to have significantly more in their pension savings than the other, especially in cases where one party has earned less or even not at all, in order to be a stay at home parent. Unfortunately pensions are often neglected in a divorce financial settlement, in particular by women who tend to live longer than men and therefore often require greater pension savings.
To make matters more complicated, how a pension is divided in the event of a divorce, differs depending on where in the country you are situated with slightly different rules for divorcees living in Scotland.
In this guide I’ve detailed everything you need to consider in order to ensure you are protecting your pension assets and what options are available when it comes to splitting a pension fairly.
Of course every situation is unique and whilst my guide can equip you with all the relevant information, it is not intended as a replacement for legal advice from a family lawyer which I would recommend in complicated circumstances or during an acrimonious split.
Step by step guide for splitting pensions in the case of divorce or dissolution
- Finding out the value of existing pensions. Both parties are required to establish the full value of any financial assets held within any pensions they have by contacting their pension provider and asking for the ‘cash equivalent transfer value’ (CETV).
- Sharing all pension information including full value, pension provider details, pension benefits statements for any defined benefit pensions, and state pension valuations with your ex.
- Establishing the need for expert help. This will depend on how acrimonious the split is as well as the complexities of the pensions in question. Only a court can issue certain orders, but it is important to ensure that your pension interests are protected by law.
- Deciding whether you require independent financial advisers or a family lawyer. Each will carry a cost and the level of advice and help you require will depend on your circumstances.
- Deciphering which of the pension splitting options is best suited to your circumstances. If it is within your budget a lawyer can offer you the best advice at this stage.
- Reaching an agreement between both parties. In certain cases couples are able to come to an agreement between themselves, however, this isn’t always possible, in which case you will require the services of the court to help you come to an agreement. This unfortunately carries significant legal costs.
- Asking the court to approve your agreement after which time your divorce can be completely finalised and your financial agreement can be actioned.
How are pensions divided up in a divorce?
The first step towards dividing up pensions fairly in the event of a divorce is to collate and value any existing pension scheme you and your partner may have. This should include any ‘lost’ pensions such as work pensions from previous jobs and the new State Pension.
When collating pensions it is also advisable to obtain a list of rules concerning each pension scheme, namely you need to know whether it can be transferred or accessed, as this can affect how you proceed with dividing up the pensions.
Exactly what can be included in the division of the pensions depends on where in the UK you are dissolving your relationship.
England, Wales and Northern Ireland
When valuing pensions for the purposes of a divorce settlement, the total pension amount that each party has built up over the course of their lifetime is considered. This includes pensions that either party may have accumulated previous to the relationship.
Only the pensions that have accumulated over the course of the relationship are considered for the purposes of the valuation. This means that any pension savings from before the marriage or civil partnership and after the split, will not count.
Finding out the value of pension assets
Most people are unaware of the value of their pensions and even have pensions that they have forgotten about. In the case of a financial settlement in a divorce, all assets must be declared as part of the matrimonial pot and failure to do so can result in costly legal fees later on.
The value added to the matrimonial pot is referred to as the ‘cash equivalent transfer value’ (CETV). This is the total amount should the pension be moved elsewhere and includes any transfer fees that may be applicable.
Should you require the CETV for a pension, this can be obtained from your pension provider, although for personal pensions this information is usually included in your annual statement.
Salary-related pension schemes
Salary-related pension schemes are more complex when it comes to a valuation. You can still ask your pension provider for a CETV, however this will rarely reflect the true value of the pension. In this instance, I would recommend that you enlist the help of a financial adviser.
How are pensions split in a divorce?
How pensions are split between the separating parties depends on the rules of the pension scheme in question. However, usually a split will be done using one of the following methods:
Pension Sharing Order
This will usually take the form of a percentage share of any qualifying pensions for each party. Once percentages have been decided, the pension will be split into two individual pots and remain as pensions that can be accessed when each individual party turns 55. The member’s ex-partner’s share of the pension is commonly referred to as pension credit and the reduction of the members pension as a result of the pension credit is referred to as pension debit.
This is a popular option among divorcees as it is considered fair and provides both parties with a clean separation entirely independent of each other.
In order to facilitate pension sharing, the recipient of the pension share will need to provide the details of their current pension, or in the case where there is no pension in existence, open a new pension in order for their pension credit to be transferred. Due to the rules in certain pension schemes, they may be forced to join the same pension scheme as their ex-partner in order for this transfer to take place.
The amount of pension to be shared is quantified by the Court who will issue a pension sharing order (PSO). The PSO will be defined as a percentage of the transfer value.
Pension sharing is completely unaffected by death or remarriage and any tax paid on the pension income is at the individual persons rate.
In the case of pension offsetting, the amount of pension owed is offset against other assets. In order for this to happen the total of all applicable pensions are valued as a lump sum in today’s terms.
This is a viable option when there are overseas pensions that are included in the settlement but cannot be shared in the UK via a court order. However, in order for pension offsetting to be an option, it is a requirement that there are other assets that are sufficient in value. Often couples will offset against assets such as the family home, although this isn’t always of more value than the pensions in question.
Pension offsetting does give each party the option of retaining their pension assets, however, a fair and equal split can be difficult to achieve.
Pension Attachment and Earmarking
Pension earmarking is currently only available in Scotland as England, Wales and Northern Ireland have replaced this with the pension attachment order. Pension attachment order leaves all pension assets where they are until the time comes to draw the pension, at which time, each partner will be paid a percentage of the pension pot as laid out by the court in the original settlement. This payment can take place as a pension income, a tax free lump sum or as lump sum death benefits.
This isn’t always the most popular option as it does not provide a clean break between the couple and control of the pension pot, including where the funds are invested and when to draw pension payments, remains with the pension holder.
It is important in this instance that you ensure your share of the pension benefits are protected in the event of your ex partner’s death within the rules of the pension scheme. You should also establish what would happen to your share should either party remarry as this can also result in the non-pension holder to forfeit their share of the pension.
It is also worth being aware of the tax implications when setting out this sort of agreement as any tax charged on the income from the pension pot will be calculated at the pension holders rate of tax, which may be the higher of the two parties.
Deferred Pension Sharing
Deferred pension sharing is often used when one party is already drawing their pension and the other party is still too young to retire. This requires an agreement from both parties to share the pension at a later date.
Due to the complicated nature of such an arrangement this can incur high legal costs. It is also worth noting that this option is not available to couples who are divorcing in Scotland.
Deferred Lump Sum
A deferred lump sum requires the pension holder to pay an agreed amount of their lump sum to their ex spouse. The responsibility for this lies entirely with the pension holder who will be required to make the payment by a date as set out by the court. This frees up the pensions assets and provides a clean break for the couple, although it does mean that the pension holder will be forced to take retirement at the time that the lump sum is due.
You are not obliged to use any of the above methods and can come to an individual agreement with your ex spouse as to how the pensions should be split. However, this will need to be legally documented.
How final salary pensions are split
Final salary (also known as defined benefit) pensions are treated a little differently as they usually present more of a challenge to divide equally. This is largely due to the fact that final salary pension schemes pay a guaranteed income for life, rather than relying on the accumulation of a pot of money.
There are however a couple of ways around this when it comes to splitting a final salary pension. The first solution is to transfer the pension into a regular pension pot to be divided between the couple using one of the methods above. However, gaining a true valuation of the pension can prove difficult and I would in this instance engage the services of a financial adviser. The other issue could be if transfers are not within the rules of the pension scheme.
The other way of splitting a final salary pension would be to split the income as it is paid. This can be a viable alternative if the pension does not allow transfers out.
All pensions are considered a joint marital asset in the UK and are therefore split equally in the case of a divorce. This will always begin as a 50:50 allocation, however there are certain factors that can swing this in favour of one party when the court is determining the end split.
Children – The needs of any children will always be the first consideration for any court involved in a divorce and therefore the primary caregiver will often receive the family home or a larger share of the home. This can in turn affect the amount of cash or pensions they are awarded.
Financial means – The court will establish the income and assets of each party to ensure an acceptable standard of living for all concerned.
Length of the marriage – Marriages that have lasted a short time may experience slightly different rulings when it comes to pension assets that were built up before the marriage.
Age and health conditions – In circumstances where there is a big age gap, or where one party is in poor health the court may rule in favour of the older party or the party suffering poor health.
Marital contributions – Spouses who have stayed at home to raise children are considered to have contributed as much value to the marriage as the main breadwinner. However, this can change in circumstances where there are full time nannies and one party is largely living a life of leisure.
How a basic state pension is split
Neither the old basic State Pension, nor the new State Pension can be shared in a divorce. However, should one party have paid enough National Insurance contributions this could increase the State Pension, known as Additional State Pension, the other party receives as long as they don’t remarry or embark in a civil partnership before they reach state pension age.
How a pension is split post retirement
The rules for splitting a pension when one or both parties are already retired are slightly more complex. It will no longer be possible to take a lump sum from your ex-partners pension pot once they are receiving an income from it. Therefore, the general rule that the courts will follow is that if one party is already drawing pension income, the other party is entitled to a 25% tax-free lump sum, regardless of whether the person holding the pension has taken the 25% lump sum or not.
Rules for cohabiting couples
Cohabiting refers to couples that are living together with shared finances but have never been married or embarked in a civil partnership.
In this instance neither party has any entitlement to the other’s pension at all. Even where there are children involved or if one party has left employment in order to raise the children.
Whilst there will be protection for children in the form of child maintenance, you will have no right to any of your ex’s assets.
What kind of pensions can be included in a divorce financial settlement?
There are many different pension types, however the courts will consider the following in a divorce settlement:
- Public sector pensions (ie NHS, Civil Service, Armed Forces)
- Self Invested Personal Pension (SIPPs)
- Small Self-Administered Schemes
- Pensions that are abroad
- Final Salary Schemes
- Additional State Pensions
- State Pension top up income
Frequently Asked Questions
Can I protect my pension savings when getting divorced?
Not really, failure to declare any pension assets can result in expensive legal costs down the line. The only other way to protect your pension is to take the ‘offsetting’ option whereby your ex-partners share of the pension is offset against other mutual assets such as the family home. This isn’t always practical but your financial adviser can help with this.
Will my wife get half my pension if we divorce?
Pension sharing orders can lean towards either spouse when allocated up to the full value of the pension (100% of the pension total). There are a number of factors the courts will take into consideration when allocating what percentage of your pension your wife will receive, however, without any other considerations the court will usually begin with a 50:50 split.
What is the typical impact a divorce will have on the value of my pension?
Prudential recently released a report that found the typical annual income from a pension to be in the region of £19,400. However, this amount is reduced to £16,300 for retirees who have experienced a divorce. This fall in value is usually due to legal fees and the impact of splitting family assets.
Do the courts need to be involved in splitting pensions?
No not always, especially in cases where the divorce is amicable. However, should you require a pension sharing or pension attachment order, this will require the involvement of the court. However, the involvement of the court is not the greatest cost to consider. Legal representation will cost more.
What is the simplest way to split a pension?
Pension offsetting is usually the most straightforward option as there is no court order required although there are disadvantages with this method and it may result in one party lacking vital income in the long term. Pension sharing is typically the best option in most circumstances and gives each party complete control of their retirement income.
Where can I access more information about pensions and divorce?
The Pensions Advisory Service offer a free advisory service relating to pensions. Relate can provide you with relationship support and offer a mediation service for couples experiencing a divorce. This is also a free service.
How can I find ‘lost’ pensions?
Now that people tend to change jobs more often in their lifetime, auto enrolment has resulted in a lot of ‘lost’ workplace pensions. These can be located using the government’s free tracing service.
How do I ensure I am getting my fair share of my husband’s pension?
71% of all divorces in the UK fail to take pensions into account at all, leaving one party financially short. If you are going through mediation then it is vital you raise the issue of any pension assets and insist on full disclosure of the value of any pension assets.
Pension sharing orders cannot be made outside of court and therefore if there are significant pension assets you should contact a family lawyer who can help ensure your husband’s pension is a part of your financial settlement.
Will I lose my share of my ex-husband’s pension if I remarry?
The answer to this depends on the way the pension has been split and the terms of the original court order. Pension attachment orders can have an issue in this respect so it is best to speak to your family lawyer or financial advisor.
Should I get financial advice to split a pension?
Pensions are complex instruments and substantial pension pots would almost certainly warrant the cost of a financial adviser in order to mitigate your exposure to tax and split the pot in a way that protects the assets within. However, the cost of financial advice will start to outweigh the cost of a small pension pot, so for pots under £100,000 you may want to give financial advice a miss.
What happens if my ex-partner fails to declare some of his existing pensions?
This is a tricky subject and it’s not unusual for one or both parties to hide assets in the case of a divorce. However, should there be a case of incorrect information in divorce proceedings, then this paves the way for the affected party to open a claim. This can end up being a costly procedure for the party that has failed to declare assets which is why it’s so important to proceed with complete transparency in any divorce proceeding.
Can I claim a share of my ex-partners pension from abroad?
Any pension schemes that have been paid into abroad, be they personal pensions or workplace pensions, are completely excluded from any financial settlement that will take place within England and Wales.
What is ‘ring fencing’ when it comes to the division of assets?
There are some circumstances where certain assets are not considered matrimonial assets. An example of this could be a substantial pension pot that has been built up before the marriage took place which could be ‘ring fenced’ outside of the matrimonial pot in the case of a very short marriage, with no children or in the case where there is a lot of money to consider.
It is important to consider that whilst many people wish to protect their pension using ring fencing, the reality is that this isn’t usually a viable option and any attempts to disguise pension assets can incur costly legal fees.