Pensions in Divorce

Overview

Pensions often represent one of the most valuable matrimonial assets in divorce proceedings, sometimes worth more than the family home. Understanding how pensions are treated during divorce in England and Wales is crucial for protecting your financial future. 

What are the types of pension affected in divorce?

• State Pension: Basic state pension and additional state pension 

• Workplace Pensions: Defined benefit (final salary) schemes and defined contribution schemes 

• Personal Pensions: Including SIPPs (Self-Invested Personal Pensions) 

• Additional Voluntary Contributions (AVCs) 

• Executive Pension Plans 

How are pensions valued in divorce?

• Cash equivalent value (CEV): The standard valuation method for most pensions 

• Expert valuations: Often required for complex schemes like final salary pensions 

• Actuarial valuations: May be necessary for accurate assessment of pension values, particularly for public sector schemes or when the CEV may not reflect true value 

What are the options for dealing with pensions on divorce?

1. Pension sharing

Pension sharing is a common way of dividing pension assets during divorce or dissolution of a civil partnership. It involves transferring a percentage of one spouse’s pension into a separate scheme for the other party, allowing both individuals to retain independent pension pots going forward. This method provides a clean financial break between the couple, which is often desirable for both legal and personal reasons. To implement pension sharing, a Pension Sharing Order must be included as part of the court-approved financial order. It’s important to note that many pension providers charge administrative fees for processing and implementing these orders, so this should be factored into financial planning. 

2. Pension offsetting

Pension offsetting is another method of dealing with pensions during divorce or separation, where the value of a pension is balanced against other matrimonial assets. For example, one spouse may retain their full pension, while the other receives a larger share of a different asset, such as the family home. This approach can be relatively straightforward and has the advantage of creating a clean break with no ongoing financial connection. However, it comes with challenges, particularly in accurately comparing the long-term value of different types of assets, like a pension versus property making it essential to seek expert financial and legal advice. 

3. Pension attachment (formerly Earmarking)

Pension attachment (also known as earmarking) is a method where a portion of one party’s pension income or lump sum is allocated to their ex-spouse when the pension comes into payment. Unlike pension sharing, this approach does not create a clean financial break between the parties. Payments are dependent on the pension holder accessing their pension, and the arrangement may lapse if the pension holder dies or if the recipient remarries. Due to these uncertainties and lack of finality, pension attachment is now less commonly used, having largely been replaced by pension sharing since its introduction. 

Factors courts consider

• Length of the marriage
• Age of each party
• Financial needs, especially in retirement
• Contributions to the marriage and family life
• Loss of pension rights upon divorce
• Overall fairness of the settlement

Important considerations

Timing

• Pension values can change substantially between separation and financial settlement
• Recent valuations are essential for accurate division

Tax implications

• Pension sharing or drawdown can have significant tax consequences
• Professional advice should be sought regarding tax-efficient transfers

Remarriage

• A financial order for pension sharing must be obtained before remarriage
• Remarriage prevents applying for a financial order except regarding pensions

Death

• Pension sharing or attachment orders cease to have effect if either party dies before implementation
• Consider updating pension death benefit nominations after divorce

Post-divorce pension planning

• Review your pension position after divorce
• Consider increasing contributions to compensate for any shared portion
• Update nomination forms for pension death benefits
• Reassess retirement plans based on revised pension projections

Important documentation required

• Up-to-date Cash Equivalent Values for all pensions
• Scheme rules for defined benefit pensions
• Form P60 and recent payslips
• Pension statement histories

Legal advice

It is advisable to seek legal advice from one of our specialist family lawyers before proceeding with a judicial separation application. We can provide guidance tailored to your specific circumstances. 

This fact sheet provides general information only and should not be considered legal advice. Laws and procedures may change over time. For advice specific to your situation, please contact us family@chadlaw.co.uk