How Pensions are Split in Divorce?
How pension is split in divorce is one of the most commonly searched questions by people going through a separation in England and Wales, and it is easy to see why. Pensions are often the second largest asset in a marriage after the family home, and yet they are also among the least understood. Many people going through a divorce are unaware that their spouse may have a claim against their pension, or that they themselves may be entitled to a share of a pension they have never contributed to.
This blog sets out the main options available to divorcing couples when it comes to pensions and what the court takes into account when deciding how they should be divided.
Yes. Pensions are a matrimonial asset and are taken into account as part of the overall financial settlement on divorce. This applies whether the pension is a workplace pension, a personal pension, a final salary (defined benefit) scheme, or a self-invested personal pension (SIPP). State pension entitlement is treated differently and is not directly shareable, though it can be a relevant factor in assessing overall needs.
As explained in the government’s guidance on money and property when you divorce, pensions form part of the financial arrangements that need to be considered alongside property, savings and investments.
No. The fact that a pension is in one spouse’s name and has only been contributed to by one spouse does not mean it is necessarily protected from being shared in a divorce settlement. The court’s approach is to consider all assets built up during the marriage as potentially available for division, regardless of which spouse accumulated them. A pension built up by one spouse over a long marriage is treated as a joint marital resource in the same way as equity in the family home.
Whilst one party may have contributed to the pension, the other may have given up career progression or pension contributions to support the family. This is precisely why the court has wide powers under the Matrimonial Causes Act 1973 to make orders in respect of pension assets, regardless of who holds them.
Pensions built up before the marriage began or after separation may be treated differently. The court has discretion to ring-fence non-marital pension accrual in appropriate cases, particularly in shorter marriages or where the pension clearly represents one party’s individual efforts before the relationship began. However, where the court cannot meet both parties’ needs without including non-marital pension assets, it will generally do so.
For a wider explanation of how different assets are considered, our blog on how assets are split in a divorce explores the factors that can influence a fair financial settlement.
The starting point for valuing a pension is the Cash Equivalent Transfer Value (CETV), which is a figure the pension provider is required to calculate on request. The CETV represents a notional lump sum that could be transferred out of the scheme and is used as a baseline for comparing pension assets with other assets in the settlement.
However, the CETV is not always a reliable indicator of a pension’s true worth, particularly for defined benefit (e.g. final salary or career average) schemes or schemes which have guarantees attached. In those cases, the CETV can significantly understate the value of the pension income that will be received on retirement. This will often mean it is necessary to have actuarial input into the calculations.
Where pensions are substantial, there are complicating factors or a defined benefit scheme (e.g. final salary or career average) is involved, it may be necessary to instruct an independent pension expert to provide a report. This is known as a Pension on Divorce Expert (PODE) report, and it can be a vital tool in ensuring that pensions are treated fairly in the overall division.
There are three main ways in which pensions can be dealt with as part of a divorce settlement.
A pension sharing order can be made by the court, instructing the pension provider to transfer a specified percentage of one spouse’s pension to the other. The percentage will be calculated with reference to the specific circumstances and, as above, may require actuarial input. The receiving spouse either becomes a member of the same scheme in their own right or transfers their share to a pension of their own.
Pension sharing provides a clean break. Both parties leave the marriage with their own pension assets and neither has any ongoing claim on the other’s pension income in retirement.
The government’s guidance on pension sharing and divorce explains how pension rights can be transferred following a pension sharing order.
A pension sharing order cannot take effect until the final divorce order has been made. It is normally advised that you wait 28 days after the consent order is agreed before applying for the final order in the divorce. Our blog on the pros and cons of applying for the final order before a financial settlement explains this timing issue in more detail.
Pension offsetting does not divide the pension itself. Instead, the value of one spouse’s pension is offset against other assets. For example, the spouse with the smaller pension (or no pension at all) may receive a greater share of the equity in the family home, or a larger lump sum, in lieu of a share of the pension.
Offsetting can be attractive where one party wants to retain their full pension and the other party wants capital now (for example, to rehouse). The difficulty is that comparing a pension with liquid assets is not straightforward, because a pension produces income in the future rather than capital now. Careful advice is needed to ensure the offset is genuinely fair in value terms, and when these calculations are required, it may be necessary to instruct a pensions expert to produce a report.
A pension attachment order is now rare and only used if a pension sharing order is not available, for example, should you be obtaining a judicial separation rather than a divorce.
A pension attachment order (sometimes called an earmarking order) does not divide the pension at the point of divorce. Instead, it directs a portion of the pension income or lump sum to be paid to the former spouse when the pension holder retires. It does not give the parties a clean break and leaves the recipient reliant on the pension holder drawing down on their pension. Further, the order terminates on the recipient’s remarriage.
No. Most pension settlements are reached by agreement between the parties, often with the help of family mediation, through the collaborative process or lawyer-led negotiation. Once an agreement is reached, it must be formally approved by the court as a consent order (alongside the rest of the agreement), but this is typically a paper exercise rather than an attended hearing.
The government’s guidance on obtaining a consent order explains how an agreed financial settlement can be made legally binding.
Should it not be possible to reach an agreement outside of the court process, then you can apply for the court to decide the appropriate outcome. Any pension sharing claims would be resolved alongside the division of the remainder of the assets, liabilities and income through that process. The court would make its decision taking into account all the section 25 factors and any expert pension evidence.
Our blog on what to expect at a final financial hearing explains how the court process works when an agreement cannot be reached.
Pensions in divorce are a complex area that requires careful analysis and, in many cases, specialist expert evidence. Getting the right advice early can make a significant difference to the outcome, particularly where one party has a substantial defined benefit pension or where there is a large disparity between the parties’ pension positions.
Our specialist divorce solicitors advise on all aspects of financial settlements, including pensions. We can help you understand what you may be entitled to, commission the right expert evidence where needed, and reach a settlement that properly reflects the value of pension assets.
Bethan Campbell is a Senior Associate in our Ascot office.
Please get in touch to speak with a member of our team, or download our free guide to divorce and separation for a practical overview of the financial issues that arise on separation.