How to protect your pension in a divorce
Despite pensions often being one of the most substantial assets of the marriage they do not always take the prominence they deserve when it comes to negotiating a financial settlement.
In this guide, we discuss what options you have when it comes to protecting your assets before marriage and during the marriage.
What are the ways of dealing with a pension in divorce?
There are essentially five options for divorcing couples when deciding how to split their pension pots upon separation:
- Pension Sharing – this is where one party is given a percentage share of their former partner’s pension pot. A Pension Sharing Order needs to be obtained from the court which states the details of the pension share. The pension share is called a pension credit – and this can be transferred into an existing or new pension scheme. The advantage of pension sharing is that it provides a clean break between divorcing parties.
- Pension Offsetting – this is where one party keeps their pension in its entirety, in exchange for matrimonial assets of the same value. For example,if the husband’s pension is worth £100,000, he could give his wife £100,000 in cash and keep his pension. This option can also result in a clean break.
- Pension Attachment (called earmarking in Scotland) – this essentially sets aside a portion of the pension pot for the other party. A Pension Attachment Order must be obtained from the court. When the pension starts being paid out, the relevant percentage will be paid out from the member’s pension to their former spouse. The disadvantage of this is that it does not provide a clean break, and if the pension holder dies before retirement their ex-spouse may receive nothing.
- Deferred Pension Sharing – this is a form of delayed pension sharing, where the ex partner does not receive a portion of the pension payment until a later date. Normally this applies to divorcing couples with an age gap eg. where one party is already receiving their pension but their former spouse will not be entitled to draw a pension until a later date.
- Deferred Lump Sum – this is an agreement which requires the pension holder to pay a lump cash sum to their former spouse upon retirement.
Either the couple separating will decide on one of these options through negotiation and mediation, or else a court may need to impose a decision.
NB: Deferred Pension Sharing and Deferred Lump Sum options are not available in Scotland.
What are my legal rights to my ex-spouse’s pension in divorce?
It is still often the case that a husband’s pension provision is much greater than that of his wife, especially if she has stayed at home to bring up children.
If they had planned to share this pension upon retirement, then the prospect of losing out on this future security can be very daunting.
Fortunately, family courts will take into account pensions when it comes to dividing matrimonial assets upon divorce.
Most divorce settlements will take into account any private pensions, especially those of couples who have had a long marriage.
How can I protect my pension in divorce?
It is not normally possible to ringfence pensions and exclude them from being factored into a financial settlement; courts will take them into account.
However, Pension Offsetting, described above, is often used as a way of protecting the pension of either spouse during divorce negotiations.
If they can agree to use other matrimonial assets to offset against a pension, the member can retain their pension in its entirety.
Another way to protect your assets before marriage is to obtain a prenuptial agreement. This agreement should be freely entered into by both parties in advance of the wedding.
Prenups are particularly common with marriages where one party has more wealth than the other, which could involve a pension fund.
As more people are getting married later in life, it is even more likely that they will want to protect their pension should the marriage break down.