UK: Pensions On Divorce Or Civil Partnership Dissolution

On divorce or dissolution, both parties are entitled to a fair and reasonable financial settlement based on the resources available, which include pensions.

In many cases, a fair division of all the assets, including pensions, can be achieved without complications, provided couples have the necessary legal information to be aware of all the options available to them. But taking expert advice can be key.

How is a financial settlement dealt with generally?

On divorce or dissolution, there will be a review of the parties' financial assets and a division between them in accordance with what is considered fair. Pensions are part of this assessment and the starting principle is that any contributions made to pension funds during the marriage should be divided equally between the parties.

How do pensions get split when you divorce?

Every pension that you and your spouse has will be valued, regardless of whether part of that pension was accrued before the relationship or marriage. That value will then be looked at together with other assets such as property and savings and there may be apportionment arguments – see below.

Although the usual starting point for asset division is sharing, and so an equal split of the assets between you, there are many reasons why this may not be fair or appropriate. Each divorce settlement is different, and how pensions are treated will vary from case to case. For example, you may wish to retain a property rather than receive a share of your spouse's pension.

What is a pension sharing order?

After you have worked out how much of one person's pension is to be paid to the other, a pension sharing order will be made by the court.

A pension sharing order takes a percentage from the pension fund of the wealthier party (pension debit) and transfers it into a pension fund belonging to the less wealthy party (who receives a pension credit). The two pensions then stand alone and the parties are free to deal with them as they see fit, completely independent of the other party.

What is pension offsetting?

This is the term used to describe taking other assets instead of a pension share. This situation commonly occurs when one person wishes to retain a house and the other wishes to retain their pension.

The values of each are worked out so that they can 'offset' each other. It is possible to do a partial offset if the values aren't equivalent.

It is important to consider this option carefully as the value of the pension provided by the scheme may not reflect the true value of the pension benefits to the parties.

Some also overestimate their ability to build their pension investments post-divorce or dissolution.

Do I need a pension actuary?

The usual answer is yes if combined pensions are valued at more than £100,000 the reason being that actuaries are qualified to value your pension both in terms of its equivalent cash value, but also to look at the value of the benefits associated with it.

There are many different types of pensions, some having a defined benefit and some based on the contributions made to the pension fund.

The actuary will be able to compare and contrast different types of pension and provide calculations for pension sharing and offsetting.

Do I need to wait for my spouse to retire before I can receive the pension share?

No. Once the pension has been shared, each person's pension pot is separate to them. Some pension companies allow you to keep the money in their scheme but some do not and it is always important to take independent financial advice on the options that might be available to you. In the case of the latter, you would need to identify a pension fund for the money to be transferred into with help from an IFA. You can then draw down on your pension when you are ready in accordance with the scheme rules. You do not need the agreement of your former spouse.

Is the state pension shared?

No, it is not possible to share this. However, it is vital to get a forecast of what your state pension will pay you as any missed contributions may affect how much you get. For example, if one of you has had a career break to have children then their state pension may be reduced. The actuary will be able to calculate what is needed from other pensions to top this up if this option is available, or to help assess what might be required to compensate one party for lost years.

Is the pension accrued before you married included?

This is called apportionment and can be a complex issue where legal advice is critical.

In very simplistic terms, the court will start by looking at the total pension value.

If one party had significant pre-marital pension then there may be some scope to argue that this part of the pension should be ringfenced, i.e. not shared between the parties on divorce/dissolution.

However, that depends on what resources the other person has available and what they will need in retirement. If pension is 'needed', a court is unlikely to be persuaded by an apportionment argument.

The court may also look at factors such as the length of the marriage (including any pre-marital cohabitation).

Can a prenuptial or postnuptial agreement protect my pension?

Any pension accrued before the marriage is capable of acquiring some protection by entering into a pre or post nup and providing for some or all of it to be ringfenced and so excluded from a settlement. However this cannot be guaranteed as a nuptial agreement is not capable of binding the family court.

The court will look at all of the circumstances, including the terms of the pre or post nup, before making a decision as to what is fair and reasonable. You should ensure that your pre or post nup is reviewed regularly and that reasonable financial provision is being made to the other party such that any reason to depart from the pre or post nup is reduced.