Divorce and pensions explained – how to make sure you get a fair deal

From choosing your lawyers to working out your childcare arrangements, the list of important decisions you need to make while going through a divorce can seem never-ending. 

But while issues such as what happens to the family home and pets can tug on your heart strings and need an immediate solution, there’s one less emotionally charged asset that you cannot afford to forget: pensions.

“Do not underestimate the importance of your spouse’s pension,” said Joshua Gerstler, financial planner at The Orchard Practice. “For most people, they are the most valuable asset you will ever own, second only to your home.”

Despite this fact pensions can often be overlooked when it comes to divorce agreements, which can mean some spouses will miss out on thousands. 

There isn’t a straightforward calculation for working out how your pensions will be split in a divorce or what you are entitled to, but there are things you can do to prepare. Here, Telegraph Money tells you what you need to know. In this piece we’ll cover:

• What happens to my pension in a divorce?
• How does the pension split process work?
• What should I prepare?
• How to protect your wealth in a divorce
• Frequently asked questions

What happens to my pension in a divorce?

When you and your spouse or civil partner get a divorce, there is no set formula for working out how to split your assets – including your pension.

Instead, your pensions will form part of the overall assets that you share, and that will need to be divided between you when you separate.

You can split your assets however you wish. You do not have to go through any legal formalities to divide your finances, but going through the courts will rubber-stamp your financial settlement and ensure that a claim cannot be made against you in the future.

If you do go through the courts, the judge will make sure that a financial settlement is “fair and equitable”, but this doesn’t necessarily mean a 50/50 split. What happens to your pension in a divorce is ultimately up to you and your ex-partner.

How does the pension split process work?

If you decide to split your pensions, there are three main ways to do so: pension sharing, earmarking, and offsetting.

Pension sharing

Pension sharing does what it says on the tin: you share your pension with your spouse at the time of divorce.

To do this, you need to get a pension sharing order through the courts. This is a legally binding agreement which stipulates the proportion of the pension that needs to be transferred to the other party. 

You can then take this to a financial adviser or your pension scheme and have the money moved. If you’re the person receiving the transfer, sometimes you can move it to your own pension pot, but some scheme rules means the money stays in the existing scheme but in your name.

The benefit of pension sharing is that it is a “clean break”. The pension values are known and agreed upon at the time of divorce, the money has been physically moved and no future event, such as death or remarriage, will affect the pensions.

Earmarking

This is known officially as a pension attachment order and is also court ordered. It effectively means that one party will benefit from the other’s pension pot in the future – some of the benefits have been “earmarked” for them.

For example, you may be entitled to 40pc of the income paid by your ex-spouse’s pension scheme. This is typically used in scenarios where one party has a much smaller pension or no retirement savings of their own.

It is less of a clean break, and if you are the one who will get these earmarked benefits, you could be at a disadvantage, as you will have no control over when you receive your pension. Instead, you will need to wait for your ex-spouse to access their pension before anything is paid to you.

You will also have no control over any contributions or investment decisions regarding your ex-spouse’s pension, and there is a chance that you could lose your rights to the pension if your former spouse were to die or remarry.

Offsetting

In this scenario, you don’t actually share your pensions at all. Instead, one of you gives up all or part of your pension in exchange for another asset, such as the house.

For example, if you were opting for an equal split and had a £500,000 pension pot and a £500,000 family home between you, you could agree to keep the house and allow your spouse to keep the retirement savings.

This could be helpful if one of you would find it hard to obtain a mortgage post-divorce due to a lack of income, for example, or if one of you was planning to stay in the home with the children after the divorce and would not be able to afford to buy the other out.

However, valuing property and pensions can be very different, and you may miss out on valuable retirement benefits if you give up all rights to your spouse’s pension. 

What should I prepare?

The first step is for both of you to figure out exactly what you have. Make a list of all the pensions you have ever paid into, whether that be workplace schemes or personal pensions like a self-invested personal pension (Sipp).

You will also need to know the value of each pot. For defined contribution pensions “pot of money” pensions where what you get in retirement is based on your contributions and any investment growth, this is relatively easy – the pot is worth however much is in there.

For defined benefit pensions, which pay out a guaranteed income in retirement, the value can be trickier. You will need to ask the scheme for a cash equivalent transfer value (CETV), which calculates what the pension would be worth if you transferred it out of the scheme as a lump sum.

You should also make a list of any other benefits associated with your pension. Some older schemes have guaranteed annuity rates attached, which means you are entitled to a set rate if you buy an annuity with your pension pot, which can be very valuable.

Jason Coppard, a financial adviser at Lumin Pension Services, suggests getting a pension sharing report from a financial adviser to iron out exactly how much each pot might be worth, and what a fair split might be.

He said: “While a CETV is used to assess the cash value of a defined benefit pension at divorce, it’s often not an accurate reflection of how good the pension is.

“A pension sharing report will also pick up valuable extras such as a guaranteed annuity rate, and will summarise the issues and outline the available options.”

It is also worth having a copy of your state pension forecast and the rules for each pension scheme.

How to protect your wealth in a divorce

There is no “best way” to share your finances in a divorce, but there are things you can do to ensure that you are treated fairly.

Make sure you have the correct valuations for all of the financial assets that you own between you, especially if there have been recent moves in the stock market or interest rates. This ensures the fairest split.

Use a financial adviser and a solicitor. You don’t know what you don’t know, and professional advice can help you navigate through the ins and outs of what you might be owed.

Once you have a financial settlement agreed, make it binding as soon as possible. The easiest way to do this is through a consent order. This is where a solicitor presents your agreement to a judge, who will decide if it is fair. Once this process is complete, your ex-partner will not be able to dispute the settlement.

“Divorces can be a stressful and complicated time, but seeking advice on your pension options can help you save money and reduce some of the worry,” said Mr Coppard. “It can also assist with long-term plans, and allow you both to budget for your new way of life.”

Frequently asked questions

What is the most common way pensions are split during a divorce?

Thanks to the “clean break” it provides, a pension sharing order is often the go-to option for couples splitting their pension pots.

As explained above, this is where your retirement savings are split at the time of divorce and provides both parties with their own pot for their future. Once a pension sharing order is issued by the courts, the split is final.

“A pension sharing order is the cleanest break for all parties and is pretty simple to execute,” said Samuel Mather-Holgate, an adviser at Mather and Murray Financial.

Wes Wilkes, chief executive at Net-Worth NTWRK, a wealth manager, said he had advised on a number of divorces where the pension was the largest asset, and in every case they had opted for a pension sharing order.

This doesn’t necessarily mean that pension sharing is the “best” way to split pensions, however, as this will depend on your own circumstances.

Is my spouse entitled to half my pension if we divorce?

Not necessarily. Instead of focusing on a 50/50 split, a court will be more concerned with ensuring that any financial settlement is “fair”.

You are more likely to be forced to give your ex-partner half your pension if you had a long marriage, there are children involved and both parties contributed to the marriage, whether that be through employment, childcare or housework. 

They will also take into account your ages, and whether each party is able to save towards their own retirement savings after the divorce.

Are all pensions taken into account in a divorce?

All types of pensions are taken into account, but whether pension pots that you built up before you were married are counted depends on where you are based.

In England, Wales and Northern Ireland, it usually doesn’t matter whether your pension was built up before or during a marriage or civil partnership.

However, a court may take a different view in special circumstances, such as if you built up a hefty pot before a one-year marriage. In Scotland, only pension assets that have been built during the marriage will count towards your pot for divorce purposes.