Pensions and divorce – how to protect yourself

Updated 10 March 2020

Pensions can be among the most valuable assets in a divorce, usually second only to the family home and sometimes even more valuable. Furthermore, one spouse in a divorce may have much more in pension assets than the other – who may face a major loss of retirement income.

If you are facing a divorce, or the possibility of one, pension should be a key consideration in any financial settlement. Here you can find out how to split the pension assets fairly, to ensure your retirement income is protected as far as possible.

How can I protect my pension when I divorce?

‘Protecting your pension’ will mean different things depending on your position within the marriage. If you have been the main earner you will probably have the largest pension savings too, so your goal may be to keep as much of these as you can.

Conversely, if you have been the lower earner (or have focused on raising the family), then your pension savings may be much lower or even non-existent. Therefore in the divorce financial settlement you should aim to secure enough pension assets to support you in later life.

Pensions are the asset most overlooked in divorce settlements, especially by women – who ironically may be in greater need of a good pension.

How are pensions shared out in a divorce?

In a divorce, pensions are considered along with the other financial assets of the marriage. It’s important to note that a divorce by itself does not determine ‘who gets what’ or who is entitled to the home, savings etc. The sharing of the assets is decided separately, in a financial agreement or financial settlement. The goal is to achieve a result that is ‘fair and equitable’.

There are three main methods to share out pensions:

• Offsetting
• Earmarking
• Sharing

Pension offsetting

Offsetting means that one spouse’s pension is traded off against the other’s assets from the marriage, e.g. the home or investments, so that the two sides balance out as fairly as possible. Problems can occur with this method if the pension is the largest single asset and there aren’t sufficient assets to trade off against it.

Pension earmarking

Pension earmarking (or ‘pension attachment’) allows the ex-spouses to split the rights to the pension benefits once these become accessible (usually from age 55). Each ex-partner will be entitled to a portion of the pension benefits, according to a percentage agreed in the financial settlement. It works a bit like a maintenance payment, made directly from the pension holder’s pension pot. The drawback of this method is that the pension holder retains control of the pot, including the choice of investments and when the pot pays out, which could both reduce the value for the other person, and also delay when they can receive their pension.

Pension sharing

Pension sharing is probably the favourite option among divorcees. This allows the splitting of the pension into two individual pots from the date of the divorce. This allows each ex-spouse to retire when they want and access the benefits when they want (from the age of 55). Pension sharing is popular because it offers the cleanest break and true independence from one another. It may also ensure a fairer settlement than offsetting (which can be a bit of an approximate method).

How is a final salary pension shared on divorce?

If either you or your ex-spouse have a defined benefit pension (also known as a final salary pension) then working out how to divide this fairly can be more of a challenge. Final salary schemes don’t involve an invested pot of money, but pay a guaranteed income for life, so the first question is how the ex-spouse (i.e. the one who is not a scheme member) can receive their share.

There are two ways in which a final salary scheme might be shared with the ex-spouse. One way is to transfer the pension into a pension pot that can then be divided according to the terms of the financial settlement. However, the pension’s transfer value may not reflect the full benefit of the scheme, so you will definitely need to seek advice on this from an independent financial adviser. Furthermore, not all final salary pension schemes allow transfers out.

Another way to share a final salary pension is to arrange for the scheme to pay out a share of the guaranteed income to the ex-spouse. This is generally only possible if the pension scheme is restricting transfers out, or if it does not permit such transfers.

To ensure you receive a fair share of the pot or income, it is a good idea to arrange your own actuarial report to calculate the benefits due to you. Your financial adviser can tell you how to go about this.

How can I get an accurate pension valuation when divorcing?

Whether or not you are the main holder of pension savings within the marriage, it is vital to get an accurate valuation of all pensions held. This can be a more involved process than simply looking at the latest pension statements.

For example, you may have multiple pension pots from previous jobs that must be traced and assessed. Some of these may have additional benefits attached, such as a guaranteed annuity rate. Final salary pensions are particularly desirable, and their value for the purposes of a financial settlement may be far greater than their simple transfer value.

The biggest risk is that there may be old pensions you have forgotten about. A divorce financial settlement requires full disclosure of assets, so if you have ‘misplaced’ any pensions you may be open to accusations that you have tried to conceal some of your assets. You may then face costly legal action in the future, and a more expensive financial settlement.

How much of my spouse’s pension am I entitled to when I divorce?

Another way to ask this is, ‘How much of my pension can my wife (or husband) claim when we divorce?’ As outlined above, this will be the subject of the financial agreement determined by the court. A financial agreement aims to achieve a fair and equitable settlement, and as a starting point will divide all assets on a 50:50 basis. However, this equal split will probably alter based on the respective needs and circumstances of each ex-spouse.

What factors can affect my share of the pension benefits?

The court will take into account a number of factors when determining how financial assets (not just pensions) are shared out. These include:

• Children
  Do you still have any dependent children? Which spouse will they live with?
   
• Financial means
  What other assets and sources of income do you have? Is this enough to maintain an acceptable standard of living? Will you have any responsibilities (e.g. caregiver)?
   
• Health and age
  The younger and healthier you are, the more able you are (in theory) to improve your financial position. Being older or in poor health may therefore entitle you to a greater share. Also, if there is a big age gap between the spouses, this may result in less being awarded to the younger spouse.
   
• Length of the marriage
  If the marriage has lasted only a short time (e.g. under 12 years) then some of the pension assets built up before the marriage may be excluded from the financial settlement.
   
• Contributions made to the marriage
  Being the ‘breadwinner’ and bringing up the family are considered to be equal contributions by the court, so the main earner does not automatically have any more right to the assets of the marriage. However – to give a hypothetical example – if the children were raised largely by nannies and the stay-at-home spouse lived a life of leisure, this could well count against them in a settlement!

How long after a divorce can I claim my spouse’s pension?

A divorce on its own does not settle your financial affairs – it simply means you are no longer married. There is no time limit after a divorce for making a claim on your ex-spouse’s finances, unless the two of you have achieved a legally-binding financial settlement.

It is therefore highly advisable to seek a formal financial agreement (which means filling out Form E). This is particularly important if your divorce is acrimonious – but even if you have what is termed an ‘amicable’ divorce, this legally binding settlement is a very good idea. Neither of you know what the future will bring, and if one ex-spouse finds themselves in serious financial difficulties in the future, it may be too tempting to pursue the other for more money, if that option remains open.

A legally binding divorce financial order will separate your finances from your ex-spouse for good, and leave the two of you to get on with your independent lives.