You might not realise it, but when you’re going through a divorce, deciding how to split your pensions is potentially one of the biggest money moves you’ll make.
The rules on how pensions are dealt with in a divorce varies depending on where you live.
In England and Wales, the rules take into account the total value of all the pensions both of you have, not just the ones from the time you married or formed a civil partnership. This includes all of your pensions, except the basic State Pension.
In Scotland, it’s a bit different. Only the value of the pensions you both built up during the marriage or civil partnership counts. Anything before you got hitched or after you called it a day doesn’t get thrown into the mix.
In this guide, we’ll help you understand more how pensions and divorces go together, or get split apart, in England and Wales.
How are pensions dealt with in a divorce?
When it comes to dividing up your assets and income during a divorce, there’s no one-size fits all solution. This is even true if the matter is taken to court, as the goal is to be fair rather than automatically split everything 50:50.
The same is true for how pensions. In some cases, they might not even take centre stage if both you and your ex already have your own pensions. However, other situations might mean that one party feels entitled to more of a share of the other's pension for one reason or another. It’s all about what makes sense for your situation and, crucially, what’s fair for both parties.
As of 2023, pensions are considered in a divorce financial settlement in three different ways, which we’ll take a look at below.
Offsetting
Under offsetting, instead of directly splitting a pension, its value gets measured in today’s money (like a lump sum), and then it’s balanced against the other stuff you own.
While you might get to keep your pension intact, your ex-partner might get a bigger slice of the non-pension assets to balance things out.
But here’s the catch: offsetting can only happen if there are enough non-pension assets to work with. If there aren’t then offsetting might not be an option.
Earmarking (Pension Attachment Order)
If you don’t have a pension but your ex does (or vice versa), a pension attachment order allows you to get a slice of their pension income or lump sum payments down the road. Essentially, your ex’s pension benefits are earmarked for your benefit - which is why it’s also known as ear marking.
But, and there’s always a but:
You have to wait until your ex decides to take their pension or they pass away;
You won’t have a say in how your ex invests their pension money;
If your ex decides to take their benefits earlier or stops contributing, you might get less than you originally thought;
If you remarry or your ex passes away, your future pension rights might be affected;
Your ex will still have to pay tax on the whole pension income, even if you get a part of it. So if your ex’s tax rate band is higher, you might get less after tax.
Pension Sharing
If you don’t have a pension but your ex does, you might decide to split up their pension benefits there and then.
This means you get a share of their pension benefits (a pension credit) which is officially transferred into your name.
Sometimes, you might get to choose whether to keep your share in the current pension scheme or transfer it to a new one. But, it depends on the pension scheme.
When you agree to pension sharing, this creates what’s called a ‘clean break.’ You and your ex know exactly how much of the pension you’re getting or keeping at the time of the divorce and this is set in stone. You and your ex are also each liable for tax on the pension income you get from your share at your own tax rate.
Final salary pensions and divorce
Navigating a divorce with a defined benefit pension, like a final salary pension, can be a bit tricky. These pensions don’t come with a clear pot of money but promise a guaranteed income for life. So, how do you go about figuring out a fair division?
Transferring the pension
One option is to transfer the pension into a pot that can be split according to the financial settlement. However, the transfer value might not show the full benefit of the scheme. So, it’s important to get advice from an independent financial advisor before considering this. It’s also worth noting that not all final salary pension schemes allow transfers out.
Direct share of income
Another option is getting the scheme to pay out a portion of the guaranteed income directly to the ex-spouse. This usually works if the pension scheme restricts transfers or doesn’t allow them.
To make sure you get your fair share, it’s a smart move to get an actuarial report to help you calculate the benefits due to you.
How to value your pension when getting divorced
Getting an accurate valuation of your pension during divorce involves more than just glancing at your latest statements. And there’s a few reasons for this.
One of these is that you might have pension pots all over the place from previous jobs, each with its own value and quirks. Some pensions could even have extra perks like guaranteed annuity rates. Final salary pensions, in particular, can be gold mines, potentially holding more value than their apparent transfer value.
You might also forget about old pensions. This can be dangerous because full disclosure is very important during a divorce. If you’ve misplaced any pensions, it might be seen as you trying to hide assets or hide money during the divorce, which is a big red flag which could have potential legal or financial implications.
For these reasons, it’s a great idea to dig deep and trace all your pension pots to make sure nothing’s left in the shadows and the final settlement between you and your ex-partner is settled by taking into account the full picture.
State pensions and divorce
After April 6th 2016, neither the old basic State Pension nor the new State Pension can be directly shared. But, if a court issues a pension sharing order during a divorce, you or your ex might still have to divvy up any extra State Pension entitlement you’ve built up. This includes an additional State Pension or any protected payment.
How much of my spouse’s pension might I be entitled to in a divorce?
If you ask the court to decide on a fair divorce financial settlement, their goal is to achieve a fair deal. This might look like a 50:50 split of assets but this can changed based on the specific needs and circumstances of each ex-spouse or civil partner.
In considering how a pension might be split in a divorce, the courts will consider:
If there are dependent children and who they will live with;
What other assets and income you both have;
Health issues or age;
Length of the marriage;
Contributions to the marriage.
It’s important to note that the court sees being the breadwinner and raising the family as equal contributions.
How long after a divorce can a spouse’s pension be claimed?
A divorce, by itself, doesn’t settle your financial affairs. So there’s no time limit for making a claim on your ex-spouse’s finances unless you’ve nailed down a legally binding financial settlement, like a clean break order. Without a solid agreement, the door is open for potential claims down the road.
For this reason, it’s highly advisable to see a formal financial agreement which is legally binding. Even if your divorce is all rainbows and unicorns, having a legally binding settlement is a smart move. The future is unpredictable, and it’s not beyond the realms of possibility that financial difficulties might hit one party prompting a financial claim. Having a settlement set in stone helps avoid any future financial disputes.
Get help with divorce settlements from Lawhive
At Lawhive, our expert family and divorce solicitors are on hand to provide help and expert advice during the course of your divorce, including reaching a fair and equitable settlement for finances.
For more information, get a free case assessment from our legal assessment specialists today. We can tell you what you need, how long it might take, and give you a fixed-fee quote for the services of our expert family law solicitors. Contact us today to get started or check out our Knowledge Hub for more resources and help on the subject of divorce.