3 common ways of splitting pensions in a divorce and why it’s important to do so

Going through a divorce is likely to be an emotionally overwhelming experience, and it can be easy to overlook certain aspects of the separation.

For example, you may find that you primarily focus on dividing your home or arranging future childcare, which is of course understandable. However, it’s also important not to overlook other valuable assets, such as your pensions.

Aside from property, pensions are often among the most valuable assets you can own. Despite this, research by Which? found that 71% of couples fail to include pensions in their divorce settlement, which can lead to a significant disparity in the split.

A study reported in the Standard found that not including pensions in divorce settlements means that between £2 billion and £4 billion is missed out on every year. Women are disproportionately represented in the figures, and many were unaware of their partner’s pension and its considerable value.

If you’re going through a divorce, you may be entitled to a share of your partner’s pension, or they may be entitled to a portion of yours. In England, Wales, and Northern Ireland, this typically involves dividing the total value of the pension. In Scotland, the focus is usually on the value accrued during the course of the marriage or civil partnership.

There may also be some circumstances in which a court determines that the pension should not be split, such as if the marriage was short or the fund is small. This could also include if a significant portion of the pension was accrued outside the time of the marriage, but each case is discretionary.

Whether you stand to lose or gain, including pensions in your settlement can make a significant difference to your financial future, so it’s a good idea to speak to a financial planner.

Read on to discover three common ways to split a pension after a divorce.

1. Pension sharing

Pension sharing is a practical and effective way to divide pensions after a divorce, providing a clean financial break and an equitable split for both parties.

A Pension Sharing Order (PSO) is issued by the court after assessing the pension’s value and determining a fair division based on both individuals’ circumstances. Once finalised, the recipient’s share, known as the “pension credit”, is transferred directly into their pension and is immediately accessible.

Pension sharing allows for complete financial independence and allows both parties to move on without being tied together through retirement. It can also help to address any significant imbalances between pension savings, which could be because one partner took more time out for childcare.

However, pension sharing can have significant long-term implications. For instance, it could reduce the tax-free lump sum available to the partner with the larger pension. The pension provider may also charge a fee to facilitate the transfer.

Given the complexity of pension division and the potentially significant sums involved, it’s a good idea to seek advice from a financial planner before proceeding.

2. Pension earmarking

Pension earmarking, also known as “pension attachment”, allows one party to receive a portion of the other’s pension but only when they begin to draw from it.

The portion – the “earmarked amount” – is determined by a court and can either be a fixed sum or a percentage of the total pension. The court instructs the pension provider to make payments to both parties according to the agreement.

This method can be beneficial as it allows both parties to have access to the tax-free lump sum from the pension.

However, one of the main drawbacks of pension earmarking is that it keeps ex-partners financially linked, potentially for many years after the relationship has ended.

If the pension holder decides to delay accessing their pension, the other person may also have to wait, which could create ongoing uncertainty and dependence. This connection can lead to tension and complications long after the divorce is finalised.

If you opt to use pension earmarking for the split, it’s important that you and your ex-partner fully understand the financial implications. Clear communication and careful financial planning can help ensure that you are both aware of how earmarking might affect your future financial stability.

3. Pension offsetting

The third commonly used method of dividing a pension after a divorce is pension offsetting. This involves one partner receiving a larger share of other assets in exchange for giving up any claim to their ex-partner’s pension.

For example, if one partner’s pension and the shared property have a similar value, the partner with the smaller pension might choose to take full ownership of the property and forego a portion of the other’s pension.

Like pension sharing, offsetting allows both individuals to make a clean financial break.

One of the challenges with this method is accurately valuing the pension, as its growth over time can be complicated to predict. It can also be difficult to agree on which assets are of an equivalent value.

Another consideration is that other assets, such as property, may not generate income in retirement in the same way a pension would. While keeping a home provides security, it could leave one partner without a steady income in later life.

A financial planner can help assess whether pension offsetting is the right choice for you and explore alternative ways to generate income in retirement if you don’t have a substantial pension.

A financial planner can help you determine which pension-splitting option is best for you

A financial planner can help you understand and navigate the financial complexities of a divorce, including determining the most suitable way to divide pensions.

They can ensure that both you and your ex-partner have a clear understanding of the value of your pensions, explore different division options, and develop a long-term strategy that secures your future.

By providing expert guidance and practical solutions, a financial planner can work with you to reach a fair settlement, which can help to reduce stress and create stability for the years ahead.

To speak to a financial planner, get in touch.

Email [email protected] or call us on 01625 466360.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.