Pensions are often the most valuable assets people have apart from the family home. They will need to be considered when you are dividing your finances in a divorce or civil partnership dissolution.
Many people will be worried about the impact on their future standard of living if they are expecting to rely on their spouse’s pension. Conversely, people with a substantial pension may be worried about having its value harmed by the terms of their divorce.
The good news is that there are several different approaches you can take to splitting pensions in divorce, and in the vast majority of cases, it is possible to negotiate an amicable settlement that will meet your current and future needs.
What are the options for dealing with pensions on divorce?
Pension sharing is something that can be agreed voluntarily between a separating couple, or it can be ordered by a court. It means that part of the value of one spouse’s pension will be transferred to the other, so they have their own separate pension.
Pension sharing orders are typically used where one spouse either has no pension, or their pension is of a much lower value than the other spouse’s.
The lower earner, or person who might not have a pension, will be entitled to a share of their ex-spouse/civil partner’s pension. The share will be transferred into their name, with a choice of it being added to an already existing pension or to a new pension. The partner who gains a share receives a ‘pension credit’, and the partner who loses a share gets ‘pension debt’.
Pension offsetting is coming to an arrangement where the value of a pension is offset against the other assets being divided in the divorce. This is only possible when there are enough other non-pension assets to offset the value of the pension.
A typical example of how pension offsetting works is that one person would keep their entire pension, and the other would receive a larger share of the other assets, e.g., the family home.
Sometimes otherwise known as a ‘pension attachment order’, this is where one person will agree to pay their ex-spouse/civil partner instalments or a lump sum of their pension. However, the instalments or lump sum will only be received when that person has reached their retirement age.
Pension earmarking is rarely used as it involves the two former spouses continuing to be financially tied together. It could also be affected if the spouse who is due to receive the benefit remarries. However, it may be worth considering in some circumstances.
How are pension entitlements decided in divorce?
Negotiated settlements are when ex-partners are willing to negotiate what will happen to their assets without going to court. This is often done through a process called ‘mediation’.
Mediation either involves a separating couple sitting together in a room with a mediator and working out the details of their financial settlement between them or ‘shuttle mediation’ where the ex-couple sit in separate rooms with their respective solicitors whilst a mediator goes back and forth.
If a settlement cannot be agreed, the division of assets will need to be decided by a court.
Court ordered divorce settlements
When an ex-couple are divorcing, and the court is splitting assets, there are various factors the court will consider when deciding how to divide the assets. The needs of any children will be considered over anything else.
Factors that could affect the sharing of assets in a divorce are set out in the Matrimonial Causes Act 1973. They are:
- The needs of any children
- The financial needs of both parties
- The length of the marriage
- Each party’s current income
- Each party’s potential future income
- Any health issues affecting either party or any children
- Assets of both parties, including pensions
- Marriage living standard
- Contributions that each party made in the marriage (financial and non-financial)
What happens if one or both people remarry?
What will happen to a divorce settlement when remarrying depends on the type of settlement that was chosen at the time of divorce.
For pension sharing and pension offsetting, remarrying has no effect as you have already received assets through offsetting or a share of your ex-partner’s pension.
However, if you did not reach a financial settlement before remarrying or the settlement you chose was pension earmarking, there is a chance that this arrangement may be affected by remarrying.
Are state pensions included in divorce settlements?
There are three types of pensions in the UK:
- State pension – This is a pension that can be claimed from the government when you reach the state pension age
- Defined contribution pension – This could be a pension arranged by you, or your workplace may have set it up where they will contribute and invest
- Defined benefit pension – This type of pension gives you a guaranteed annual pension which is valued on your income, length of time with the employer and the terms and conditions of the scheme
Both defined contribution pension and defined benefit pension are included in a divorce settlement. The only one that is not included is a state pension.
Contact our family law solicitors in Bristol for advice on pensions and divorce
Pensions have to be carefully considered when getting divorced. Our divorce and pensions experts can provide clear, expert advice on what you need to do to make sure they are dealt with fairly and that your future financial wellbeing is protected.
For expert advice on any matters related to divorce and separation, you can contact your local Henriques Griffiths office in Bristol or Winterbourne or use our simple enquiry form to ask a question or request a call back.