Dividing pensions on divorce: what are your options?

Pension sharing, offsetting or earmarking? Scott Buchanan discusses your options when it comes to dividing up your pension during a breakup.

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Pensions and divorce law have changed over the years and considering that in the current climate divorce and separation are more common than ever and rates are continuing to increase, consumers need specialist advice on how to share their assets fairly and amicably.

As pensions can be a complicated area, they are sometimes the single asset that is the most overlooked and even when they are taken into consideration more often than not they aren’t split to the satisfaction of both parties

When it comes to finding a solution that favours both parties the three main ways of sharing pension assets are:

  • Offsetting
  • Earmarking
  • Sharing

Each of these has its own merits and pitfalls.

Offsetting

Offsetting simply means that one partner’s pension is traded off against the other’s assets accumulated from the marriage, such as the home or investments etc, to try to give each party a fair share, but problems can occur when the pension is the largest single asset and there aren’t any other sufficient assets to trade off against it.

Earmarking

This allows the parties to split the rights to the benefits of the pension when it becomes payable.  When the pension is due to pay out, it will pay both parties, with each party getting the percentage agreed upon in the divorce.  Unfortunately, the person that owns the pension has complete control over how the pension monies are invested and indeed when they pay out, which could reduce the value of and delay the payment to the other person.

Sharing

Following relatively new legislation, the courts have introduced pension sharing, which allows the parties to split the pension into two individual pensions upon the date of divorce.  Unlike Earmarking, this allows each party to retire when they want (within the pension scheme options) and to manage their own monies how they see fit.

Pension sharing is fast become the favourite option, as it is seen as a complete and clean break away from one another.  Unlike offsetting, it ensures that one party doesn’t get an unfair proportion of one asset and less of another.  Both parties get their fair share of all assets, including the pensions.

Please note each divorce situation is different, and as they can be a very complicated and emotive subject it is important that you seek guidance from both a solicitor and a qualified independent financial adviser to find out which of the above options may best suit your circumstances.