A Complete Guide to Pensions & Divorce
Pensions are often the most important asset, other than the family home, to be added to the matrimonial pot upon divorce.
However, many couples do not take account of pensions for purposes of the financial settlement, as this can be a rather complex area.
We will answer most of your frequently asked questions and consider some of the aspects of pensions and divorce in our complete guide below.
What is the process of pension splitting in divorce?
Following the valuation of a pension, there are several options of dividing it between the divorcing parties:
Pension Sharing
Under a pension sharing arrangement, one party is given a percentage share of their ex-spouse’s pension pot.
It is necessary to obtain a Pension Sharing Order from the court which sets out the details of the arrangement.
The pension share is called a pension credit. A pension credit can be transferred into another existing or new pension scheme.
Pension sharing provides a clean break between divorcing parties.
Pension Offsetting
Pension offsetting allows one party to retain their pension in its entirety, in exchange for matrimonial assets of the same value.
For example, instead of adding their pension to the matrimonial pot, they can forego a relevant share of the value of the family home.
This option also results in a clean break following the divorce, preventing future claims against your pension.
Pension Attachment (called earmarking in Scotland)
A Pension Attachment order sets aside a portion of the pension pot for the other party.
When the pension starts being paid out, a relevant percentage will be paid out to their former spouse.
This option does not provide a clean break. Also, if the pension holder dies before retirement age, their ex-spouse may receive nothing.
Deferred Pension Sharing
In this scenario, an ex-spouse will receive a portion of the pension payment at a future date.
This typically applies to divorcing couples with an age gap, where one party is already receiving their pension but their former spouse will not be entitled to draw a pension for several years.
Deferred Lump Sum
This agreement requires the pension holder to pay a lump cash sum to their former spouse upon retirement.
How does a divorcing couple decide on an option?
The couple separating will normally decide on one of these options through negotiation and/or mediation.
The arrangements you reach on the division of your pensions will form your financial agreement and should include all other held assets, such as savings, property, and assets.
Whichever option is chosen, a consent order should then be obtained to ensure that the agreement is legally binding.
If you cannot agree on how to split your pensions, a court may need to impose a decision.
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Do I have to share my pension when I divorce?
Your pension should always be included in your financial settlement if you divorce or dissolve your civil partnership.
Pensions are usually one of the most valuable assets within marriage after the matrimonial home. This can, however, depend on the length of the marriage.
Once you have agreed upon your settlement you will need to write it in a legally binding consent order.
Can My Ex Claim My Pension?
You should always include your pensions within your consent order. If you don’t either party can make a claim on their ex-spouses pension, regardless of how long they have been divorced.
There have been many cases in the press showing spouse’s that have been divorced for 10+ years claiming future and further money and assets from their ex-partner.
What happens to each type of pension after divorce?
Private pensions
The value of any private and occupational pensions should normally be added to the overall matrimonial pot, along with the family home and any other assets.
The total value of the matrimonial pot is then divided up between the divorcing couple in a way that is fair for both parties.
State pensions
Neither the Basic State Pension nor the New State Pension can be shared after divorce.
These state pensions are therefore not added to the matrimonial pot.
However, the court can order the Additional State Pension to be shared after marriage, although not if the beneficiary remarries.
NHS and police pensions
NHS pensions and police pensions are treated as public sector occupational pensions.
Although there are some differences compared to private workplace pensions, they can be shared in largely the same way after divorce.
The same applies to the pensions of all other public sector workers.
What is a pension attachment order example?
As discussed above, a Pension Attachment Order sets aside a portion of the pension pot for the other party.
When the pension starts being paid out, the agreed percentage will be paid out from the member’s pension to their former spouse.
Example of a pension attachment order
John and Amanda are getting divorced. They agree that John should share 25% of his pension with Amanda and ask the court for a pension attachment order to that effect.
When John retires, he is due to receive £1,000 per month in total. As a result of the pension attachment order, the pension provider pays John £750 per month and pays £250 per month to Amanda.
How much would I be entitled to?
If the couple cannot reach a financial settlement between themselves, the court will generally add the value of any pensions to the overall matrimonial pot. The total is then divided up, with a starting point of a 50:50 split.
In the case of pension assets accrued by either party before marriage, the court will decide on how to divide these assets on a case by case basis, with a view to:
- Length of marriage – the longer the marriage lasted, the more likely it that any pension assets accrued before the marriage will be added to the matrimonial assets to form part of the overall matrimonial pot (Miller v. Miller).
- Value of pension – if the pension is very substantial and a significant portion was accrued before the marriage, it is more likely that the court will attempt to differentiate the value of the pension accrued before and after marriage.
But as a general rule, the overall value of any pensions will normally be added to the matrimonial pot before being divided up, with a starting point of a 50:50 split.
The main exception to this rule is where one party had already accrued a significant pension prior to the marriage and the marriage was short.
Scottish pensions and divorce: In Scotland, only the value of pensions that have been accrued during the marriage is taken into account. Any pensions accrued before the marriage are not added to the matrimonial pot. Similarly, pensions accrued after the date of separation are not taken into account.
Can I inherit my ex’s pension?
If a former spouse is designated as a beneficiary in the will of their ex, they will inherit any unspent money in the pension pot (or a specified portion thereof).
If they are not designated as a beneficiary in the will, the position is more complicated.
A former spouse will not directly inherit the pension assets of their ex-husband or wife.
But they can make a claim under the Inheritance (Provision for Family and Dependants) Act 1975 for a portion of inheritance – including pension assets – if they have not remarried and if the claim is brought within 6 months of the grant of probate.
How to protect pensions from my ex-partner
In general, it is not possible to exclude pensions from being taken into account for purposes of a financial settlement.
The value of any relevant pensions should normally be added to the matrimonial pot. But, as discussed above, Pension Offsetting can be used if one spouse wishes to retain their pension in its entirety.
Pensions accrued before marriage can be given some protection through the use of a prenuptial agreement or postnuptial agreement.
But although courts need to take these into account, they are not legally binding.
In order to separate pensions accrued before marriage from pensions accrued after marriage, it can be a good idea to start a different pension after getting married.
Once a divorce settlement has been reached, a consent order can prevent any future claims on the pensions of either spouse (ie which go beyond their agreement).