Pensions and divorce explained

The cost-of-living crisis has raised a multitude of challenges on people’s day to day finances. One of the big casualties is pensions and divorce, as there has been significant rise in people reducing or stopping their pension contributions. Of those saving into a pension scheme over the past twelve months:

• 13% have reduced their contributions and a further 20% are considering doing so over the coming months.
• 7% have already ceased their contributions.
• 17% of those old enough to do so have withdrawn money from their pension savings to meet short-term needs.

The cost-of-living crisis is also putting pressure on relationships. With many families struggling to make ends meet, this has led to a surge in divorce rates. New data from the Ministry of Justice showed that there were more than 33,200 applications for divorce and dissolution between April and June 2022, which statisticians called the “highest number of applications in a decade”. Following a recent survey published by Relate, 19% of the participants had considered starting a divorce in 2023.

So how does this affect divorce pension rights?

A pension is often the largest or second largest and valuable capital asset in a marriage or civil partnership. As such, it is important that pensions are considered in any divorce settlement. Frequently, one person has a substantial pension, and the other might have none or a very limited pension provision because, for example, they have given up their job to look after the children.

In an ideal world it is assumed that a couple will benefit from a pension or pensions when they retire, but as recent events such as the pandemic have shown us not all events go to plan.

How are pensions split in a divorce UK?

There are several different options to resolve pensions after divorce depending on the circumstances of the couple concerned. The right one will depend on the rules of the pension scheme that is being split, age and employment status.

In some cases, pensions can be transferred immediately and in other’s a person may only receive a percentage share of the pension when their former spouse or civil partner has retired.

The options relating to pensions after divorce are:

• Pension sharing
• Pension offsetting
• Pension earmarking.

Pension sharing

Pension sharing on divorce, the new procedure – With pension sharing all or a percentage share of person A’s pension(s) is transferred to person B. Person B can then either become a member of their former partner’s pension scheme or transfer the value of the scheme into another pension.

This is the preferred option in many cases because a person can feel more in control of their own future rather than being dependent on an ex-spouse. They can decide when they retire, and if the recipient dies before retirement, the pension benefits can be paid to children or a new spouse.

Pros

• It achieves a clean break.
• It can help to make sure both parties have pension provision in retirement.
• Remarriage, death, or other change in circumstances will not affect the order.

Cons

• One person’s future lump sum and income might be reduced.
• There’ll usually be a fee to pay to the provider to make the split.
• For high earners, care might be needed because the pension credit could affect the recipient’s lifetime allowance by increasing the value of their pension provision.

Pension offsetting

Here the pension is not actually split at all. Instead, it is offset against the value of other assets, such as the house. For instance, a spouse/partner might give up a claim on a pension fund in return for a larger share from any property.

Pros

• It keeps things simple. 
• One party might need to use other assets (for example, a home to live in).
• It can be hard to value some assets as their values might change at different rates and times.
• Offsetting orders are not affected by remarriage or death.

Cons

• One person might be left with little or no pension provision upon retirement. 
• It can be difficult in some situations to divide assets fairly using pension offsetting, especially as the value of a person’s pension schemes might, in the future, be their most valuable asset.

Pension earmarking

With earmarking, the Court awards a percentage of the income the other party receives from a pension to the former spouse/partner. They only start to receive it when the former spouse or civil partner starts taking the pension.

Pros

• It allows for both the tax-free cash benefit and the pension income benefit to be earmarked.
• Death-in-service benefits can also be earmarked.
• If the member transfers pension rights, the earmarking order will follow the member’s rights to the new arrangement.
• The ex-partner will have some provision in retirement.

Cons

• It does not allow for a clean break between the divorced couple, and the couple might need to remain in contact for many years after the divorce/dissolution.
• If the scheme member dies before retiring, or if the ex-partner marries or forms a civil partnership, any earmarking order (other than for lump sum death benefits) usually end.
• The earmarked payments do not start being paid until the member retires.
• If the ex-partner is older than the member or if the member delays their retirement, this might have financial implications for the ex-partner. 
• The payments stop on the member’s death, leaving the ex-partner without that income for the last years of their life. 

How are pensions regarded in divorce?

In a divorce, pensions are considered along with the other financial assets of the marriage. The theoretical starting point is a 50:50 split of all pensions. However, in practice, this will depend on the rest of your divorce financial settlement.

You should not assume that you are entitled to any specific percentage of your spouse’s pension as this will depend on your specific circumstances, including your relative financial positions, financial needs and what other assets there are that need to be considered.

At what age can I collect my ex-partner’s pension?

This will depend on the terms of their pension policy. Payment of the designated benefit would generally commence when the remainder of the retirement benefit starts to be paid to the member spouse.

Can ex wife claim my pension years after divorce uk?

There is no limit on how long after a divorce you or your spouse can make a claim against each other’s pensions provided you have not entered a legally binding settlement (Consent Order) after a divorce.

If such a divorce financial settlement exists, then neither you nor your spouse will be able to make any further claim over each other’s pensions.

What if we’re just separating?

If you are just separating, and not formally divorcing or dissolving a civil partnership, your pension arrangements remain the same. However, if you want to change your pension beneficiary in the event of your death, you should fill in your pension provider’s “expression of wishes” form.

What needs to be done to divide pensions on divorce?

 Some preparation needs to be done before you can divide your pensions in a divorce or dissolution of a civil partnership.

Both parties need to have a list of all the different pension assets they hold – these includes:

• Workplace pensions
• Personal schemes, including self-invested personal pensions (SIPPS) and stakeholder pensions
• Any portion of your basic state pension that was built up under the additional state pension rules before April 2016.

From these pensions you will need to know the cash equivalent transfer value (CETV) of any pensions. Scheme administrators have an obligation to provide these details.

More information about pensions and divorce, have a look at this helpful video from PensionBee called – What happens to my pension during a divorce?

Frequently asked questions

Why do pensions get split in divorce?

A pension is often the largest or second largest and valuable capital asset in a marriage or civil partnership. If a pension was earned by one spouse during the marriage it is generally considered an asset to the marriage and therefore is subject to division in divorce.

What is the most common way pensions are split on divorce

Pension sharing is the most common way to split pensions on divorce. It involves dividing the pension fund immediately upon divorce so each spouse walks away with a share, which they then control themselves.

Pension sharing makes a clean break possible and ensures neither of the couple is left in the worst possible position when it comes to building a retirement income.

pensions and divorce

pensions and divorce

pensions and divorce

pensions and divorce

pensions and divorce

pensions and divorce

pensions and divorce

pensions and divorce

pensions and divorce