If you’re going through a divorce, dividing up any pensions that you have is likely to be one of the largest financial decisions you’ll need to make as pensions can be among the most valuable assets, second only to the family home in most cases. Typically, one spouse in a divorce will have much more in pension assets than the other so it is important to split them fairly to ensure your retirement income is protected as far as possible.
Despite being so valuable, pensions are the asset that are most overlooked in divorce settlements, and ironically, especially by women. Research by the University of Manchester found that one partner holds at least 90 per cent of the pensions wealth for about 50 per cent of couples. Divorced women in their late sixties who live alone have only 30 per cent of the pension wealth of divorced men of the same age.
So how do pension benefits get divided in a divorce?
What exactly can be divided depends on where in the UK you are getting a divorce. In England and Wales, the total value of the pensions you’ve each built up is taken into account. This doesn’t only mean 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. In Scotland, however, only the value of the pensions you’ve both built up during your marriage or civil partnership is taken into account.
There is no set formula as to how your assets and income will be divided. If you end up going to court, they’ll 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 and so too will be the treatment of any pensions. In some cases pensions could be ignored altogether if you and your ex-partner both have your own.
What are the options for dealing with pensions in a divorce?
There are three main ways your pension can be divided:
This is where the value of any pension is offset against other assets. In other words, one partner would keep their pension and in return, their ex-partner would receive a greater share of other assets. This is not possible if there are not enough non-pension assets.
This is also known as a ‘pensions attachment order’ and works by allowing the partner without the pension to receive income and/or lump sum payments from it 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 other partner if the pension scheme member dies.
There are some disadvantages to earmarking if you are the one without the pension. You must wait until your ex-partner retires or dies to receive your earmarked benefits, you’ll have no control over the investment decisions your ex-partner makes and if you marry or your ex-partner dies, you may lose your right to a future pension.
Probably the favourite option among divorcees, this is when the pension benefits are split at the time of the divorce to achieve what is known as ‘a clean break’. Both partners know at the time of divorce how much of the pension they will receive or keep and death or remarriage on either side has no effect on the sharing order.
Do I need legal advice when getting a divorce?
When you get divorced, you don’t have to go through any legal formalities to divide your finances but if you fail to get a financial settlement authorised by the courts, your spouse could make a claim against you in the future.
A recent case reported in the media shows the importance of not overlooking pensions in a divorce and of getting proper legal advice. Christine Bruce-Reid had split up on good terms from her husband Ian and had agreed, through a deed of separation – which are often used before beginning divorce proceedings – to split all their finances 50:50. Unfortunately, Ian died suddenly after having a stroke, four months after their divorce had gone through.
At this point, all the finances had been sorted except for Ian’s pensions, which were worth around £450,000. As Christine had stopped working 17 years ago when their first child was born, she had very little pension provision of her own. When trying to split the pension before Ian died, the couple had been told that the deed of separation was not enough and that they needed a pension sharing order, which is issued by the Family Court as part of divorce proceedings. However, Ian sadly died before this was resolved, leaving Christine facing retirement without a proper pension.
The simplest way to get a binding financial settlement is through a consent order – which would include a pension sharing order – where a solicitor sets out the agreed arrangements that are then approved by a judge.
What about the state pension – can that be shared?
Your basic State Pension cannot be shared if you divorce. However, under current rules, if one of you has paid enough National Insurance contributions, this could increase the State Pension that the other gets, providing they don’t remarry or enter into a civil partnership before they reach their State Pension age.
From 6 April 2016, 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-partner may have to share any extra State Pension entitlement you have built up.
Get in touch
Kate Thomas heads up our Family & Matrimonial department at Harding Evans and knows how stressful and emotionally draining divorce proceedings can be. Our expert and friendly team can advise you on all aspects of family law. For a confidential discussion about your situation, please contact the Family Law team on 01633 760678 or email hello@hevans.com.
