Pensions and Divorce

If you are going through a divorce and you and your ex-spouse are looking at dividing up your assets, then it's worth noting that your pension may actually be one of the largest assets you have - it could be worth even more than your home - and so may very well be a major consideration in your divorce settlement.

What Options Are There For Dividing Your Pension?

When splitting your marital assets, there are three methods that may be used to help assess how your pension should be divided.

1. Pension Offsetting

This method, where all pension rights are balanced against other assets (such as the matrimonial home, savings and investments) is the most straightforward. The value of all assets are calculated, and then traded off against another as fairly as possible. For example, if one party had a pension fund of £200,000, and the jointly-owned matrimonial home was also worth £200,000, then it could be agreed that the pension holder keeps all rights to their pension, whilst the other party keeps the right to live in the matrimonial home.

However, it can be difficult to achieve a fair balance using this method, as the pension pot typically has the greatest value, and there may not be enough assets to balance against it. If it is too difficult to achieve an agreement through offsetting, one of the following alternative options is likely to be used.

2. Pension Sharing

From 1 December 2000, the Welfare Reform & Pensions Act 1999 gave powers to the Court to split pension rights between husband and wife, so that an agreed portion of the pension value and benefits is transferred to a new pension plan on behalf of the ex-partner. As the splitting of benefits is done immediately (rather than waiting for retirement for ownership of the benefit) this offers couples a clean break.

The ex-spouse receives the benefit as either a pension credit (as determined by the court), which may be retained under the existing pension scheme or transferred to another pension vehicle, or as a cash value that can be transferred to a separate pension plan with another provider, or maintained separately with the pension provider.

The Pension Sharing Order normally takes effect from the date on which the Decree Absolute of Divorce or nullity is pronounced.

3. Earmarking

Pension Earmarking was first introduced on 1 July 1996 by the 1995 Pensions Act. This method is probably the least frequently used, as it can be extremely complicated. In this arrangement, when one party's pension eventually comes into payment, a portion of it will be paid to the other party. A court order instructs the pension provider to pay an agreed amount of the member's pension and/or lump sum to the ex-spouse when the member retires. The amount is determined by the judge, and is specified at the time of the divorce.

However, this means that the ex-spouse will have to wait for their former partner to retire before receiving any money, which is not ideal for those looking for a clean break. Only the spouse with the pension can make any decisions about investments, and the benefit may be lost if the spouse without the pension remarries or the pension holder dies before retirement.

How Does Divorce Affect Your State Pension?

If you divorce, then you may still be able to use the National Insurance (NI) record of your former spouse to increase your basic State Pension. You can do this for all the tax years in which you and your former spouse were married, or up to the year in which you attain state pension age, whichever comes first.

However, if you later remarry before you attain state pension age, then you will lose your right to claim on your former spouse or civil-partner's NI record. You may retain your claim if your re-marriage takes place after you reach state pension age.

In addition, you may be entitled to a share of your former spouse's State Second Pension or State Earnings-Related Pension Scheme (SERPS) if the Courts decide it should be shared as part of your financial settlement on divorce.