Don’t divorce your right to a decent pension

Samantha Downes

by , Financial Journalist

12 June 2024 /  

Divorce papers and wedding rings

First introduced in December 2000, pension splitting or sharing is a formal agreement designed to include money built up in a pension as a part of a divorce settlement. Nearly 25 years later, industry experts say there’s still a lack of awareness of how finances can be split in a divorce.

A spokesperson from The Law Society says: “Pensions are complicated. Because of this, too many women aren’t including their ex-partner’s pension in divorce. There’s a reluctance to see a pension as a joint asset.”

The Institute and Faculty of Actuaries (IFoA) estimates that 60% of divorces ignore pensions. This equates to around £1.8 billion a year in pension funds. It’s thought that divorcing women tend to be more focused on their family’s immediate needs, such as housing. Keep reading to find out more about pension splitting in divorce.

Pension vs. property

Even if your ex-partner has only been putting away a small amount each month into their pension, it could be worth thousands of pounds by the time they come to retire. If they have a defined benefit pension (also called a ‘final salary’ pension), it could be worth even more.

Pension splitting - the facts

In England, Wales, and Northern Ireland, the total value of both parties’ combined pensions are taken into consideration. This includes amounts saved before your marriage. The rules are different in Scotland, as only the money saved during your marriage is considered as a part of the financial settlement. How your pension is then divided depends on factors such as your age, how long you’ve been married and the types of pensions you have.

What type of pensions do you have?

You’ll need to look at what type of pensions you or your ex-partner have been paying into as the rules around splitting them differ.

  • Defined contribution pensions (a personal or workplace pension) - these are the most common type of pension and are based on how much is paid in and the performance of your investments over the years.

  • Defined benefit pensions (also called ‘final salary’ pensions) - these are a type of workplace pension that’s based on your salary and the number of years you’ve worked for the employer.

In both cases, you’ll need to get a pension valuation from the provider. This is called the Cash Equivalent Transfer Value (CETV). If either of you have a defined benefit pension, depending on the value, you may need help from an Independent Financial Adviser (IFA) who specialises in divorce or dissolution.

Each divorce settlement is different, so how the pension is split will depend on your circumstances. There are three main ways of splitting a pension.

  • Pension Offsetting - the value of you and your former partner’s pensions are used to offset other assets, such as property.

  • Pension Sharing Order (PSO) - you take a percentage share of your former partner’s pension by either joining their pension scheme or transferring your share to a scheme in your name.

  • Pension Attachment Orders and Earmarking - some of your former partner’s pension is paid to you, usually when they start to withdraw it.

Both Pension Offsetting and PSOs offer a clean financial break for both parties. With a Pension Attachment Order, you’ll need to wait until your ex-partner starts taking their pension before you can access any of the money. Plus, you have less control over where the pension remains invested and if you remarry or your former partner dies, you’ll stop receiving the payments.

A spokesperson from The Law Society says: “One client said she was happy having the house - which had around £150,000 equity in it - and wasn’t interested in looking at her ex-partner’s pension. I managed to persuade her to consider it. It turned out her ex-partner’s pension fund was worth just over £1 million.”

What about the State Pension?

The rules around divorce and the State Pension are complex. How your State Pension could be split, if you receive it, depends on your age. If you receive the old State Pension (you reached State Pension age before 6 April 2016), it consists of two parts - the basic State Pension and additional State Pension. Your basic State Pension cannot be shared in a divorce settlement. However, the court can issue a PSO on additional State Pension, if you or your ex-partner receive it.

If you reached the State Pension age after 6 April 2016, or are yet to reach State Pension age, you’ll be eligible for the new State Pension. The new State Pension can’t be split in a divorce settlement. For more information, and to check your State Pension eligibility, go to gov.uk.

If you’re going through a divorce, visit MoneyHelper to access their resources or to contact their free helpline.

Samantha Downes is a financial journalist and has written for most national newspapers and women’s magazines. She’s also the author of two finance guides and has set up the Substack PumpkinPensions to help guide people looking to save more towards their future.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

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