Pensions in divorce settlements
Making sure pensions are dealt with fairly on divorce
A pension is often the largest or second largest capital asset in a marriage or Civil Partnership. As such, it is important that pensions are considered in the divorce settlement. You should get expert advice as soon as possible to make sure you fully understand your pension rights after divorce.
Pensions can be complex and confusing at the best of times, but the details need to be addressed carefully by a divorce lawyer aided by an experienced independent financial adviser (IFA) or actuary if you and your lawyer think that is necessary.
Frequently, one person has a substantial pension, and the other might have none or a very limited pension provision because, for example, they have given up their job to look after the children. You and your lawyer need to consider if that pension should be shared or if you should receive more of another asset, such as the home instead.
It is normally the wife who has the lowest (if any) pension provision, as the couple assumes she will benefit from the husband’s pension when he retires. There is no automatic entitlement to a spouse’s pension, but the court will look at all the facts and figures in each case.
Our divorce and pensions solicitors can advise on:
- Whether you are entitled to a share of your spouse’s pension
- Options for protecting your pension
- How to deal with pensions during divorce, including:
- Pension offsetting
- Pension sharing
- Pension earmarking
We can also help with all other aspects of divorce finances.
Take a look at our team to find a divorce and pensions lawyer who is right for you.
Speak to us about divorce and pensions in the UK
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What happens to a pension on divorce?
There are a number of different approaches to tackle pensions in divorce settlements depending on the circumstances of the couple concerned. These are offsetting, earmarking and pension-sharing.
Pension sharing is the preferred route of most divorce courts but offsetting and, to a lesser extent, earmarking, are also still valid in some cases. It is vital you discuss your case and unique set of circumstances with an experienced family lawyer. This will give you the best chance of a fair, expedient outcome taking into account all pensions each party has.
This is the preferred choice in the majority of cases these days.
Thanks to the Welfare Reform and Pensions Act 1999 (WRPA), this allows one party the opportunity to secure a percentage of their spouse’s pension rights and to put that percentage into their own name.
This is preferable in many cases because a person can feel more in control of their own future rather than being dependent on an ex-spouse. They can decide when they retire, and if the recipient dies before retirement, the pension benefits can be paid to children or a new spouse.
It is important to note that when a pension is divided or shared, this does not mean that the recipient will receive a cash lump sum. A pension or part of a pension that is ordered to be transferred from one party to another still remains a pension and has to be invested in a pension plan.
Offsetting involves balancing the pension fund against other matrimonial assets, such as the house. For instance, a wife might give up a claim on a pension fund in return for a larger share of the profits from any property.
Anyone considering this route, though should think about it very carefully because of the different nature of capital assets and pensions. Pensions are not liquid assets and, as such, can only be turned into cash on retirement. Their value on retirement could be much higher than at the time of assessment.
With earmarking, the court awards a percentage (it can be 100%) of the income the other party gets from the pension to the former spouse. This seems fairly straightforward and fair.
However, pension earmarking has numerous disadvantages, which is why it has fallen out of favour. For instance, the income stops at the death of the pension holder or if the wife remarries.
Due to the various drawbacks, pension earmarking is now rarely used.
How are pensions valued during divorce?
One of the most difficult tasks when dealing with pensions and divorce is working out the actual value of a pension fund. This is particularly important when valuing occupational pension schemes, such as those in the armed forces, police service and NHS.
There are at least 100 different methods of calculating the value of a pension, and to make a comparison fair, it can be necessary to get an expert to value the pension or pensions, especially where the assets include different types of pensions.
There are recent cases where a pension fund has been increased by almost a third by getting a proper valuation. When you are talking of pension funds which can be worth from £500,000 to £1 million or more (such as a GP or senior officer in the armed forces may have) that is a significant difference.
Expert advice and guidance from experienced professionals are the only way to ensure you are not left rueing the financial settlement whilst still getting over the emotional break-up.
How is a pension split on divorce?
The process of considering pensions in a financial settlement should be as follows:
- Find out what pension provision there is, both private, company and state and secure a valuation and forecast.
- Decide with your lawyer if the amount of the pension and the facts of your case make further investigation justifiable (i.e., the cost versus benefit). There are at least a hundred different ways to value a pension. Further investigation can mean a drastic increase or reduction in the pension asset, frequently seen with Final Salary Pensions and with Government and Civil Service pensions (such as teachers and armed forces pensions for example).
- If you wish to push ahead, investigate fully, ideally helped by a specialist IFA or Pension Actuary (your lawyer will be able to recommend someone).
- Decide how to adjust the settlement in the light of this knowledge.
Do I have to share my pension when I divorce?
There is no simple answer to this question as it will depend on other factors. What other assets are available to be shared? What is the value of your pension? Does your spouse have savings, investments and pensions in their own name? Are you willing to ‘offset’ the value of other matrimonial assets to enable you to keep your pension?
We recommend seeking early advice when considering divorce to ensure you fully understand the implications for your finances, including your pension.
What should I do first?
There are many different types of pensions, and their terms and value can differ too. You, and your partner may have a state pension, company pension and perhaps a personal pension too. Your first step, therefore, is to quantify your pensions alongside your savings, shares, investments and any property of business interest you may have.
Having quantified the pension assets, you can then fully consider your options in relation to your pension. You should always seek expert pensions and divorce advice before making any decisions.
How much of my husband’s or wife’s pension am I entitled to after divorce?
As with other matrimonial assets, the theoretical starting point is a 50:50 split of all pensions. However, in practice, this will depend on the rest of your financial settlement
You should not assume that you are entitled to any specific percentage of your spouse’s pension as this will depend on the circumstances, including your relative financial positions and what other assets there are that need to be considered.
We recommend speaking to one of our specialist divorce settlement solicitors as soon as possible so you can understand your rights and what you may be able to achieve when splitting matrimonial finances.
At what age can I collect my ex-partner’s pension?
At what age you can begin to draw a benefit from an ex-partner’s pension will depend on the terms of their pension policy. However, this would only apply if you have used pension earmarking to deal with pensions on divorce (which is rarely a good option).
If you have used pension sharing, then you will have your own pension. When you begin to receive it will again depend on the terms of your policy.
How do I protect my pension in a divorce?
If you wish to protect the value of your pension in divorce, then you will most likely need to consider pension offsetting as part of your divorce settlement. This means that you will have to give up other assets, such as your share of the family home, in order to offset the value of your pension.
How long after divorce can you claim a pension?
There is no limit on how long after a divorce you or your spouse can make a claim against each other’s pensions unless you have made a clean break order. This is a court order which severs financial ties between you and your former partner.
If you have a clean break order, then neither you nor your spouse will be able to make any further claim over each other’s pensions.
Speak to us about divorce and pensions in the UK
Pensions are a very complex area, and a divorce lawyer should be employed to look into what you might be entitled to or liable for. Our specialists are highly skilled in dealing with pensions in divorce settlements and court applications to decide on the division of pensions and other matrimonial assets.