Divorce Settlements – What about the Pension?

We last spoke here about the “no-blame” divorce decree – a major change in divorce laws that came into effect in England and Wales in April 2022. All that will be required is for one party to state that there was an “irretrievable breakdown”.

This greatly simplifies the process.

But there are still other things to take care of that can be complex. Particularly when sorting out the finances.

What each party is entitled to differs from case to case. Generally, the types of matrimonial assets that may be included are money, property, businesses, vehicles, financial support (child/spousal maintenance), life insurance policies and possessions such as furniture and appliances.

And of course, pensions.

Pensions

The law allowing divorcees to share pensions came into effect in 2000, yet a very small percentage of people include their pensions in financial divorce settlements. Pensions are pipped to the post by family homes and businesses because their value is often overlooked.

In fact, pensions usually hold greater monetary value than property in the marriage.

Particularly for women. This is because the average man has almost ten times the amount of pension wealth a woman has, according to a recent study.

So a pension sharing order can be of far more use and value to former spouses – particularly women – than property or abusiness.

But it could be, with many going the DIY divorce route, thatdividing pensions seems too complicated to handle. But it can be worth getting the assistance of a solicitor or financial advisor to be able to go this route. 

Multiple Pensions

Preparation is key when it comes to dividing pensions. It is quite common these days to have a few pension “pots” when retiring, such as:

• Workplace pensions

• Any portion of your basic state pension that falls under the Additional State Pension/SERPS rules

• Personal pension schemes, for example Self-Invested Personal Pensions (SIPPs), Group Personal Pensions (GPPs) or stakeholder pensions

It is best for both parties to list all the pension plans they have and to acquire a copy of the rules for each plan so that the value of these can be taken into account in the settlement.

You will need to know:

• The recent values of both your and your partner’s pensions (including the Cash Equivalent Transfer Value of any final salary pensions) and submit a financial statement (form E).

• If there are any other pension benefits available to a spouse or civil partner under these schemes. These could be amounts that would be paid to you or your children when a spouse dies, which may be nullified with divorce.

Pension Splitting

Factors such as pension scheme rules, age and employment status have a bearing on which is the best route for you to go, but here are some of the options that may be available:

• Pension Offsetting

Pension Offsetting is where one person keeps their pension in exchange for letting go of another asset such as the family business or home. Although this allows for a clean break, it can be difficult to make sure the distribution is fair.  

• Pension Sharing

A Pension Sharing Order is transferring a percentage of one person’s pension to the other. The party on the receiving end could become a member of the other’s pension scheme or transfer the value of that to another pension. Having separate pensions is great but financial advice is necessary to navigate this complex process.

• Pensions Attachment

Also known as “Earmarking”, this is when a lump sum or income is paid to the other when they start taking their pension. Similar to maintenance, it can be a fair way to split the pension. However, it also means it’s not a clean break as the pension holder has control over what investments are chosen and when payments are made.

• Deferred Pension Sharing (not applicable in Scotland)

If one spouse is older and already receiving a pension, this is the option to share the pension at a later date.

• Deferred Lump Sum (not applicable in Scotland)

This is when one party, upon retiring, is required to pay a percentage of their tax-free pension lump sum to the other.

• Individual Agreement

It is possible for the divorcing couple to come to their own financial agreements regarding their pensions without involving the court. However, it is best to document what has been agreed to legally and seek professional advice before going with this option.

We hope this has helped shed some light on the subject. For any assistance with this process, please contact us.