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How are pensions dealt with in a divorce?
How is a pension split in a divorce?
Pensions should be identified, valued (using a cash equivalent transfer value, referred to as a “CEV” or “CETV”), and considered as part of the overall division of finances. Ideally, a pension expert called an “actuary” (and known as a Pension on Divorce Expert or PODE) should be utilised where the pension value exceeds £100,000 or there are defined benefit schemes. This is because the true value of a pension benefit may not be clear from the cash equivalent transfer value.
There are three main ways pensions can be dealt with on divorce:
- Pension sharing orders
- Pension offsetting
- Pension attachment orders (earmarking)
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What are pension sharing orders?
Pension sharing in divorce is the process of splitting a pension between spouses or civil partners as part of a financial settlement. An agreed percentage of one person’s pension benefits is transferred into a pension in the other person’s name. Pension sharing is one of the most common ways pensions are divided during divorce proceedings in England and Wales.
Pension sharing on divorce can only be achieved through a court order, known as the Pension Sharing Order (“PSO”). This order sets out how much of the pension(s) will be given to you or your ex-spouse and can only be implemented when your divorce or dissolution is completed by the court pronouncing a final order.
Find out more on pension sharing orders in our latest advice.
What is pension offsetting?
Pension offsetting is where one party keeps their full pension while the other receives a greater share of another asset. For example, you might get a bigger share of the family home while your ex-spouse keeps their pension. It is only possible if there are enough non-pension assets.
This option can sometimes be simpler but requires careful evaluation by a pension actuary to ensure fairness. It is not an easy exercise to compare the value of a pension to a non-pension asset (such as equity in a property or money in the bank) as it is not a pound for pound exercise. A pension provides a future income stream. Advice from a pension actuary is required before considering settlement options which involve offsetting pensions.
If you choose this option, it will need to viable overall and reflected in a court order.
What are pension attachment orders (earmarking)?
A pensions attachment order, sometimes called ‘earmarking’, allows one person to receive part of their ex-spouse’s pension pot which will then be paid as an income when the pension comes into payment at retirement, or immediately if the pension is already in drawdown.
This method is rarely used as there is no ‘clean break’ involved and one party will remain dependent on the other. It offers less certainty on what they would receive as the other party could pass away before retirement age – in which case the pension income would cease, and this benefit would be lost which poses a risk to the recipient of a pension attachment order.
How much of my pension will be taken into account by the court?
The total value of the pensions that each party has built up is considered. This means all your pensions, not just the ones that each of you held before you were married or in a civil partnership.
In some circumstances, it may be possible to exclude pensions that were accumulated outside the duration of the marriage (including the period you spent living together, provided there was no break, and it led seamlessly into marriage or a civil partnership). However, typically for a long marriage the starting point is equal pension sharing, unless both parties can meet their future needs based on sharing only marital pensions. If seeking to exclude non-marital pensions, you would again need to consult a pension expert to calculate the true value of non-marital pension assets.
How does my pension plan affect pension sharing?
Your ex-spouse may have an entitlement to your private pension; they will not have an entitlement to your basic UK state pension. The type of your private pension can affect how it’s valued, what gets shared and the options the receiving spouse has.
Public sector pensions, such as teachers pensions or armed forces pensions, are eligible for sharing. However, due to the high value of these pensions and the complex rules that govern them, sharing these can be complex and a pension actuary should be consulted.
If you have a pension based outside the UK, it cannot be shared under a UK court order but it will still be taken into account as part of the matrimonial pot as it is an asset which you will be benefit from in the future and must be considered in order to calculate a fair split of your overall assets.
Do I need a court order?
Only a court can make a Pension Sharing Order or a Pension Attachment Order following a divorce. Pension offsetting does not require a court order, but we would always recommend getting one to ensure certainty and enforceability should something go wrong.
How do we split our pension if we divorce after we have retired?
If you and/or your ex-spouse have retired when you get divorced and your pensions are in payment, the pensions can still be shared and considered as part of the settlement. In addition, the income can be shared via a Pension Attachment Order.
However, you may be restricted in how you then deal with these pensions as it may not be possible to take a lump sum from a pension that is already in payment, and in most cases the tax free lump sum would already have been withdrawn at the time of drawing down on the pension.
In such cases, a pension actuary should be instructed to advise on the various options.
What is the impact of overlooking the pension pot for women?
One common question is: “Can my ex-wife claim my pension years after we divorced?” If you do not obtain a court order dealing with your finances upon divorce all financial claims remain open in the future. It is important that both parties consider pension assets at the time of divorce and options for pension sharing.
Overall, it is very common for there to be a significant disparity in pension wealth between couples. This is often due to women taking time out of work for maternity leave and working reduced hours whilst children are young to provide childcare.
There is also the gender pay gap to consider – where women are paid less than men for the same job.
All of the above result in a gender pensions gap as highlighted in a report by the Pensions Policy Institute in 2019. Research suggests that there is a 56% difference between men and women in pension assets at retirement age on average, and it falls in favour of the men.
Here’s an overview of how this looks:
- According to research carried out in 2021 by the University of Manchester, 90% of the pension wealth is held by one party – this tends to be the man in different-sex couples – in around half of couples. Fewer than 15% of couples have approximately equal pensions.
- Women, unfortunately, often lose out when it comes to pensions in divorce and often do not include them as part of discussions. Scottish Widows statistics show that 60% of divorced women did not talk about pensions in their divorce, with almost 28% of these not knowing that they should be included.
- Research that the team here at Stowe carried out also shows that if pensions are not part of divorce conversations, it costs women an average of £79k they reach retirement.
Those couples undertaking a DIY divorce are most likely to be at risk. This is because it is unlikely they will consider the true value of their individual pensions and their mid-to-long-term needs.
Data from Court statistics found that between 2016 and 2021 only about 80,290 of 602,491 divorces included pension provision (by pension sharing or attachment order). That represents approximately 13% of divorces over that period.
It is far too common for parties to ignore or forego their claims against their ex-spouse’s pension in favour of retaining the family home. This puts them at risk of swapping long-term income security for immediate housing stability.
Furthermore, on average, women have a longer life expectancy than men. This means that they need a more substantial capital fund at retirement to produce the same annual income over their lifetime post-retirement.
What one of our expert lawyers says
Francesca Sanderson, Associate at our Farnborough family law office, says:
“Although pensions can now be shared on divorce or dissolution, through pension sharing orders, this is not automatic and remains proportionate to negotiations in financial settlements rather than a statutory right to equal pension wealth.
“Another important consideration is that women who are unmarried and have cohabited with a male partner for a significant period of time, currently lack any legal provision for pension sharing orders upon separation. As a result, they may have given up work to care for children and cannot obtain pension sharing orders in the same way as divorcing women.
“It is important for divorcing parties to obtain a report from a Pensions on Divorce Expert (PODE) when recommended. Women, in particular, may agree to offset pension assets in exchange for a greater share of the net equity or capital needed to re-house themselves, without fully appreciating the true value of the other party’s pension assets or the long-term implications of forfeiting pension sharing options to which they may otherwise have been entitled.”
What next?
It is important to seek advice from a family lawyer to ensure that you are clear on the pension options available to you. At Stowe, we have a number of lawyers who are experts in pensions and divorce and can help guide you through the process.
It is often the case that a pension actuary is required to advise you regarding the true value of pension assets and options for sharing the same to ensure a fair division of the matrimonial assets. We can put you in touch with professionals who can give you expert advice about your money and your potential future income.
Get in touch with our expert financial experts or call us on 0330 159 9194 to speak to our team.
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