How Will A Divorce Affect My Pension?

When couples separate, discussions about finances tend to focus on the family home, savings, and income. Pensions are frequently overlooked, despite often being the most significant financial asset in a marriage after the property. Understanding how pensions are treated on divorce in England and Wales is paramount to ensure that any financial settlement is fair and protects your long-term financial security.

Are Pensions Taken Into Account in Divorce?

Pensions that have been paid into throughout the marriage are a matrimonial asset and must be considered as part of any financial settlement on divorce. Under section 25 of the Matrimonial Causes Act 1973, the Court is required to have regard to all financial resources that you have or are likely to have in the foreseeable future. This expressly includes pensions.  The Court has a duty to consider pensions even if neither of you raise them and a failure to address pensions in a financial settlement can have serious consequences for one or both of you in retirement.

It is also worth noting that the Court aims, where appropriate, to achieve a “clean break”. This means that all financial claims are resolved in one settlement, so that neither of you remain financially dependent on the other. Pension sharing is a key mechanism for achieving a clean break in respect of savings for retirement.

How Are Pensions Valued?

The starting point for valuing a pension in divorce proceedings is the Cash Equivalent Transfer Value (CETV). This is a figure provided by the pension provider that represents the current capital value of the pension benefits accrued to date. Each of you should obtain a CETV for every pension you hold as part of the financial disclosure process.

However, it is important to understand that the CETV is not always the optimal measure of the true value of a pension. In cases involving substantial or complex pension assets, the Court and parties’ advisers may recommend instructing a specialist Pension on Divorce Expert (PODE) to provide a more detailed analysis. The cost of doing so is often justified where pension assets are significant, as an inaccurate or incomplete valuation can result in a settlement that is fundamentally unfair to one of you.

The Three Main Approaches to Pensions on Divorce

There are three main ways in which pensions can be dealt with as part of a divorce settlement in England and Wales: offsetting, pension attachment orders, and pension sharing orders. Each has its advantages and disadvantages, and the most appropriate approach for you will depend on your individual circumstances.

1. Offsetting

Offsetting generally involves one of you retaining your pension in full, while the other receives a greater share of other assets. For example, you might keep your entire pension pot whilst your spouse receives a larger share of the equity in the property or other property.

Offsetting has the advantage of simplicity and can be attractive especially where one of you wishes to remain in the family home. However, it requires careful consideration because it involves comparing fundamentally different types of assets. Property or savings are seen as immediately realisable, whereas a pension provides income in retirement. A pound of pension is not necessarily equivalent to a pound of property equity or savings.  Without specialist advice there is a real risk of you being prejudiced.

2. Pension Attachment Orders

A pension attachment order directs a pension provider to pay a specified portion of the pension income, lump sum, or death benefits directly to your former spouse when the pension holder retires or the relevant benefit becomes payable.

Pension attachment orders are relatively uncommon in practice, due to their significant drawbacks. They do not provide a clean break, as the recipient remains financially dependent on their former spouse choosing when to retire, and the order will cease if the recipient remarries. In addition, the former spouse retains control over the pension fund and its investment decisions, which can affect the ultimate value of the benefits received.

3. Pension Sharing Orders

Pension sharing orders are the most commonly used and, in most circumstances, the most effective mechanism for dividing pension assets on divorce.

A pension sharing order is a court order providing for a specified percentage of one spouse’s pension to be transferred to the other spouse, creating what is known as a “pension debit” in the paying spouse’s scheme and a “pension credit” in favour of the recipient.

The order specifies a percentage of the pension to be transferred rather than a fixed monetary sum. This is because the value of the pension may fluctuate between the date of the order and the date of its implementation. The percentage chosen will depend on the overall financial settlement and the relative values of all matrimonial assets. There is no automatic rule that pension assets must be split equally, and the appropriate division will depend on the circumstances of your case.

A pension sharing order can be made by the court or agreed between you as part of a consent order. Importantly, the order cannot take effect until the final order of divorce has been granted. This means that whilst the court can make the order before the final order, it will not be implemented by the pension provider until after the marriage has been legally dissolved. This is one reason why it is important not to delay in seeking a financial settlement alongside the divorce itself.

Once the pension sharing order has been implemented, the recipient spouse receives a pension credit, which is an entirely independent pension entitlement in their own name. They will typically have a choice between an internal transfer (joining the same pension scheme as an independent member) or an external transfer (moving the pension credit to a scheme of their own choosing). The pension credit belongs entirely to the recipient and is wholly independent of the former spouse’s pension from that point onwards. This is one of the most significant advantages of pension sharing over other approaches, as it provides a true clean break in relation to retirement savings.

The State Pension

The new State Pension (for those reaching state pension age on or after 6 April 2016) cannot be the subject of a pension sharing order and cannot be transferred between spouses.

It is, however, a financial resource that the court will take into account when considering the overall fairness of a settlement under section 25 of the Matrimonial Causes Act 1973. Where there is a significant disparity in your State Pension entitlements, this may influence the division of other assets.

If you reached state pension age before April 2016, it is possible for the Additional State Pension to be shared.

Why You Should Not Ignore Pensions in a Financial Settlement

Research consistently shows that women are disproportionately affected by the failure to address pensions on divorce. Where you or your spouse has a substantially larger pension than the other, failing to address this in the financial settlement can leave the lower-earning spouse facing significant financial hardship in retirement, despite having contributed to the family in other ways throughout the marriage.

Even where pensions appear modest in value, they should always be disclosed and considered. An informal agreement to “keep your own pension” may seem straightforward at the time of separation but can prove deeply unfair in the long term.

How Can We Help?

At Farleys, our specialist family law team has extensive experience advising clients on all aspects of financial remedy proceedings, including the treatment of pension assets on divorce. We can guide you through the disclosure process, advise you on the most appropriate approach for your circumstances, liaise with pension on divorce experts where necessary, and ensure that any agreed settlement is properly recorded in a court order that protects your position, both now and in the future.

If you are going through a divorce and would like to discuss your financial position, including your pension entitlements, please contact us to arrange an initial consultation with a member of our family team. Either call 01254 606 008, or use our online enquiry form.