Pensions and divorce: how to protect yourself

Pensions can be among the most valuable assets in a divorce, usually second only to the family home and sometimes even more valuable.

One spouse in a divorce may have much more in pension assets than the other, who may face a major loss of retirement income.

If you are facing a divorce or the possibility of one, pensions should be a key consideration in any financial settlement.

Here, you can learn how to split pension assets fairly to ensure your retirement income is protected as much as possible.

How can I protect my pension when I divorce?

Protecting your pension will mean different things depending on your position within the marriage.

If you have been the main earner, you may have the most pension savings, so your goal may be to keep as much of these as possible.

Conversely, if you have been the lower earner or have focused on raising your family, then your pension savings may be much lower or even non-existent.

In the divorce financial settlement, you may want to secure enough pension assets to support you in later life, recognising your non-financial contribution to your marriage and family.

Pensions are the asset most overlooked in divorce settlements, but they are especially important for women.

They usually have smaller pension pots due to working part-time around caring responsibilities, reducing their earning power and ability to save, or earning less than men due to the gender pay gap. 

How are pensions shared out in a divorce?

In a divorce, pensions are considered along with the other financial assets of the marriage.

It’s important to note that a divorce by itself does not determine ‘who gets what’ or who is entitled to the home, savings and so on.

The sharing of the assets is decided separately, in a financial agreement or financial settlement.

The goal is to achieve a result that is ‘fair and equitable’.

There are three main methods to share out pensions:

• Offsetting
• Earmarking
• Sharing

Pension offsetting

Offsetting means one spouse’s pension is traded off against other assets from the marriage, such as the home or investments, so the two sides balance out as fairly as possible.

For instance, you might keep your pension while your former spouse takes a larger share of the marital home. An advantage of offsetting is it can be relatively simple and offer a ‘clean break’ financially following a split. It may be harder to use this method if the pension is the largest single asset and there aren’t sufficient assets to trade off against it.

Pension earmarking

Pension earmarking (or ‘pension attachment’) allows the ex-spouses to split the rights to the pension benefits once these become accessible (usually from age 55).

Each person will be entitled to a portion of the pension benefits according to a percentage agreed in the financial settlement. It works like a payment from the pension holder’s pension pot.

The drawback of this method is the pension holder retains control of the pot, including the choice of investments and when the pot pays out. This could both reduce the value for the other person and delay when they can receive their pension.

Pension sharing

Pension sharing is probably the most popular option among divorcees. This allows a pension to be split into two individual pots from the date of the divorce.

This allows each ex-spouse to retire when they choose and access the benefits when they want (from the age of at least 55). Pension sharing is popular as it offers the cleanest break and true independence from one another. It may also ensure a fairer settlement than offsetting, which can be an approximate method.

How is a final salary pension shared on divorce?

If you or your ex-spouse have a defined benefit pension (also known as a final salary pension), it can be more challenging to divide it fairly.

Final salary schemes don’t involve an invested pot of money but pays a guaranteed income for life, so the first question is how the former spouse, who is not a scheme member, can receive their share.

There are two ways in which a final salary scheme might be shared in a divorce settlement.

One way is to transfer the pension into a pension pot that can then be divided according to the terms of the financial settlement.

However, the pension’s transfer value may not reflect the full benefit of the scheme, so you will need to seek advice from a financial adviser. It’s important to note that not all final salary pension schemes allow transfers.

Another way to share a final salary pension is to arrange for the scheme to pay out a share of the guaranteed income to the ex-spouse. This is generally only possible if the pension scheme restricts transfers or does not permit them.

To ensure you receive a fair share of the pot or income, it is a good idea to arrange your own actuarial report to calculate the benefits due to you.

A financial adviser can tell you how to go about this.

How can I get an accurate pension valuation when divorcing?

It’s in the interests of both you and your ex-spouse to get an accurate valuation of all pensions held between you. This can be a more involved process than simply looking at your latest pension statements.

For example, you may have multiple pension pots from previous jobs that must be traced and assessed. These may include additional benefits, such as a guaranteed annuity rate.

Final salary pensions are particularly desirable, and their value in a financial settlement may be far greater than their simple transfer value.

The biggest risk is forgetting about old pensions. A divorce financial settlement requires full disclosure of assets, so if you have ‘misplaced’ any pensions, you may be open to accusations you have tried to conceal some of your assets.

You may then face costly legal action and a more expensive financial settlement.

How much of my spouse’s pension am I entitled to when I divorce?

Another way to ask this is, ‘How much of my pension can my wife (or husband) claim when we divorce?’ As outlined above, this will be the subject of the financial agreement made between you or determined by the court.

A financial agreement aims to achieve a fair and equitable settlement. As a starting point, it will divide all assets on a 50:50 basis. However, this equal split will probably alter based on the respective needs and circumstances of each ex-spouse.

What factors can affect my share of the pension benefits?

The court will take into account a number of factors when determining how financial assets (not just pensions) are shared.

These include:

• Children: Do you still have any dependent children? Where will they live, or how much time will they spend with each parent per week?
• Financial means: What other assets and sources of income do you each have? Is this enough to maintain an acceptable standard of living? Do you have any responsibilities (e.g. are you a caregiver)?
• Health and age: The younger and healthier you are, the more able you are (in theory) to improve your financial position. For this reason, being older or in poor health may entitle you to a more significant share. Also, if there is a big age gap between spouses, this may result in less being awarded to the younger spouse.
• Length of the marriage: If the marriage lasted only a short time (usually considered five years or less), some of the pension assets built up before the marriage may be excluded from the financial settlement.
• Contributions made to the marriage: Being the ‘breadwinner’ and raising the family are considered to be equal contributions by the courts, so the main earner does not automatically have more rights to assets of the marriage.

How long after a divorce can I claim my spouse’s pension?

A divorce on its own does not settle your financial affairs – it simply means you are no longer married.

There is no time limit after a divorce for making a claim on your ex-spouse’s finances unless the two of you have achieved a legally binding financial settlement.

It is highly advisable to seek a formal financial agreement (which means filling out Form E).

This is particularly important if your divorce is acrimonious – but even if you have an ‘amicable’ divorce, this legally binding settlement is a good idea.

 Neither of you knows what the future will bring, and if one ex-spouse finds themselves in serious financial difficulties in the future, it may be too tempting to pursue the other for more money, if that option remains open.

A legally binding divorce financial order will separate your finances from your ex-spouse for good and leave the two of you to get on with your independent lives.

If you found this article helpful, you might also find our articles on getting a divorce after Christmas and no fault divorce informative, too.

Need help with your finances?

If you’re facing a life-changing event like a divorce, it’s always a good idea to get financial advice to ensure your money goals stay on track.

Unbiased can quickly match you to a qualified financial adviser who can look at your unique circumstances and future goals and recommend the best course of action.