When couples begin discussing their finances during divorce, attention often turns first to the family home, savings and bank accounts. Pensions can receive considerably less attention, particularly when retirement still feels many years away. Yet a pension can be one of the most valuable assets built up during a marriage. In some cases, its value may even exceed the equity held in the family home. Understanding what happens to pensions on divorce is therefore an important part of reaching a fair financial settlement.
Are pensions taken into account during divorce?
Yes. Pensions can be considered alongside other assets when the financial arrangements arising from a divorce are determined.
This can include workplace pensions and private pensions as well as certain State Pension rights. Pensions must be identified as part of the financial disclosure process. Typically, information will be obtained about the value of each person’s pension arrangements so that both parties have a clearer picture of the overall financial position. However, the figure provided for a pension does not necessarily tell the whole story.
Different types of pensions can provide very different benefits, and comparing two pensions simply on their stated values can sometimes be misleading. More complicated or particularly valuable pension arrangements may require specialist pension advice or actuarial input.
What is a pension sharing order?
One option available on divorce is a pension sharing order.
This allows a percentage of one person’s pension rights to be transferred for the benefit of their former spouse or civil partner. The recipient effectively obtains pension rights in their own name rather than simply relying upon their former spouse to provide support in retirement.
Pension sharing can therefore help provide greater financial independence following divorce, but a pension sharing order must be made by the court. It cannot simply be implemented through an informal agreement between the couple.
Do pensions always have to be divided?
No. Dividing a pension directly is only one way of taking pension assets into account when negotiating a financial settlement. Another possibility is known as pension offsetting. This involves balancing the value of pension rights against other assets.
For example, one spouse might retain more of their pension while the other receives a larger share of the equity within the family home.
This can initially sound attractive. Someone may understandably prioritise remaining in their home over receiving pension benefits that cannot be accessed for many years.
However, £100,000 of pension value is not necessarily equivalent to £100,000 of cash or property equity. The assets work differently, can have different tax implications and may provide very different benefits over someone’s lifetime.
For this reason, offsetting should be considered carefully rather than simply comparing headline figures.
What if one person built up most of the pension?
It is common for couples to reach divorce with very different pension provision.
One spouse may have remained in continuous full-time employment and accumulated a substantial workplace pension, while the other may have reduced their hours or taken time away from employment to care for children.
As a result, there can be a significant difference between their retirement positions.
The fact that a pension is held in one person’s name does not automatically mean it should be ignored when determining the financial arrangements following divorce.
The court considers the parties’ wider financial circumstances rather than simply looking at whose name appears on each asset.
What about pensions built up before the marriage?
This can become a more complicated issue. Someone who had already accumulated a substantial pension before marrying may feel that the entire pension should not be considered in the same way as benefits accumulated during the marriage.
How pre-marital pension contributions are treated will depend upon the circumstances, including the length of the marriage and both parties’ financial needs. There is therefore no simple rule that automatically excludes everything accumulated before the wedding.
Can we just agree to keep our own pensions?
Couples sometimes decide that the easiest solution is for each person simply to keep the pension held in their own name. That may be appropriate in some cases, particularly where pension provision is relatively similar.
But it should not be assumed to be fair without first understanding the value of the pensions and what benefits they are expected to provide. The consequences may not become apparent until many years after the divorce, when one former spouse approaches retirement with substantial pension provision while the other has very little.
This is one reason pensions should be considered before the overall financial settlement is finalised rather than treated as an afterthought.
Making the financial settlement legally binding
Even where separating spouses agree how their finances should be divided, it is generally important to have the agreement formalised through a consent order approved by the court. A consent order can deal with property, savings, investments, maintenance and pensions and provides both parties with greater certainty about their financial position after divorce. Where pension sharing has been agreed, the appropriate pension sharing order will need to form part of the court process.
Don’t overlook your future finances
Understandably, the immediate financial pressures surrounding divorce can make retirement seem less important than questions such as where you will live next month. However, decisions made during divorce can affect your finances for decades.
Before agreeing to leave pensions untouched or exchange pension rights for another asset, it is important to understand what you may be giving up.
At Townsend Family Law, we can help you consider pensions as part of the wider financial settlement and advise you on the options available, ensuring that both your immediate needs and your longer-term financial future are properly considered.
