For many couples, pensions represent the most substantial financial asset in a marriage, sometimes surpassing the value of the family home. Yet when a relationship breaks down, pensions are frequently overlooked or misunderstood. If you are going through a divorce, understanding how are pensions split in a divorce UK is essential to making sure any financial settlement truly reflects what you are entitled to. Getting this wrong can have consequences that last well into retirement.
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Are Pensions A Matrimonial Asset?
Yes, pensions are classed as a matrimonial asset, which means that the court has wide powers to deal with them. This includes workplace pensions, personal pensions, and self-invested personal pensions. The State Pension is treated differently and cannot be shared through a pension sharing order, though it may be factored into the overall picture when the court considers the income needs of each party in retirement.
The starting point in most cases is that assets built up during the marriage are available for division, though this does not mean that every pension is automatically split equally. The court will consider a range of factors, including the length of the marriage, the age and health of each party, their respective financial needs going forward, and any contributions made before the marriage began.
We can advise you on how pensions are likely to be treated in your specific circumstances and what approach is most likely to achieve a fair outcome for you.
How Do You Value A Pension?
Before any decisions can be made about how to deal with a pension, it needs to be valued. The standard method is to request a Cash Equivalent Transfer Value, known as a CETV, from the pension provider. This is the figure that represents the lump sum value of the pension rights at a given point in time. Both parties should obtain CETVs for all pensions held by either of them, not just the larger ones.
For defined benefit, or final salary, pensions, the CETV can significantly understate the true value of the income that the pension will produce in retirement. In these cases, it is often advisable to instruct a pension actuary or an independent financial adviser with specialist expertise in pension on divorce valuations to provide a more detailed analysis.
What Are The Main Approaches To Splitting Pensions?
There are three ways in which pensions can be dealt with as part of a divorce settlement: pension sharing, pension offsetting, and pension earmarking.
• Pension Sharing
A pension sharing order is issued by the court and directs the pension provider to transfer a specified percentage of one party’s pension rights to the other. The recipient receives what is known as a pension credit, which is their own separate pension entitlement, either within the same scheme or transferred to a scheme of their choice. Pension sharing is widely regarded as the cleanest and fairest approach because it achieves a genuine financial separation, and once implemented, which must happen within four months of the pension provider receiving the required documentation, the arrangement is final.
• Pension Offsetting
Under pension offsetting, rather than splitting the pension itself, one party keeps their pension intact while the other receives a larger share of a different asset, most commonly the family home or savings. The difficulty is that comparing a pension with a property or a cash sum is not straightforward, and an offset that appears equal on paper may not produce equivalent financial outcomes in practice.
• Pension Earmarking
Under a pension attachment order, the pension remains in the name of the original holder, but when it comes into payment, a specified portion is paid directly to the former spouse. The principal drawback to this method is that the financial link between the former spouses remains until the pension is drawn, and if the pension holder dies before retirement or remarries, the attachment can be lost entirely.
What Happens With Defined Benefit Pensions?
Where one or both parties hold a defined benefit pension, including many public sector pensions for teachers, NHS staff, civil servants, and armed forces personnel, the process requires particular care. In these cases, a pension on divorce expert report is frequently needed to calculate how a pension share should be structured to achieve equality of income or capital in retirement. Without this analysis, there is a real risk of agreeing to a split that disadvantages one party significantly.
Do You Need To Go To Court To Split Pensions?
Many couples are able to reach agreement on financial matters, including pensions, without the need for contested court proceedings. Several members of our family law team are members of Resolution, an organisation of specialist family lawyers committed to reducing conflict in family law through constructive methods such as collaborative law. Our team is well versed in reaching excellent settlements for our clients in non-acrimonious ways and without ever needing to go to court.
However, even when a couple reaches an agreement between themselves, the terms must be embodied in a court order to be legally binding. A pension sharing order cannot be implemented without a court order in place. It is a common misconception that an agreement reached between solicitors or in mediation is, in itself, enforceable. It is not until the court seals the order that either party is protected.
We can help you draft a consent order that accurately reflects your agreed settlement and ensure it is submitted correctly so that implementation can proceed without delay.
If you would like advice on how pensions are likely to be dealt with in your divorce, or on any other aspect of family law and practice, contact our family law team today. You may also find our guide on pension rights after separation useful.
Please call us free now on 0800 059 0600 or complete a Free Online Enquiry and a member of the team will get back to you soon.
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