What are the rules on pension sharing?
30 Aug 2022 | Lisa Pepper
Pensions are one of the biggest assets of a marriage, yet many people are uncertain about whether they are entitled to a share of their ex-partner’s pension in a divorce. In fact, seven out of every ten couples do not include pensions in their financial settlements, according to the consumer group ‘Which’? This can leave a significant disparity in their respective retirement funds.
Here, we explain how pensions are usually divided, what you need to consider, and what happens if you omit to share pensions in your divorce.
Do you have to share your pension when you divorce?
Pensions are generally an illiquid asset; for example you can’t access the fund to buy a house. The court will take many things into account when deciding what is a fair pension split, including:
- What pensions you both currently have
- The length of time you were married
- How much of the pension was built up before the marriage (or post-separation if you have been separated a number of years)
- What pension income it would provide, and when is it reasonable to expect you to retire
How are pensions usually divided in a divorce?
There are three main ways in which pensions are usually dealt with:
Pension sharing: This is where a portion of the pension is transferred from one person’s pension to the other person’s pension. The recipient may have a current fund willing to receive the pension credit, or may have to open a new pension plan; or sometimes the payer’s pension fund will open a new plan for the recipient. It will be for the recipient to decide what pension fund s/he wants to receive the pension credit. Advice from an IFA is recommended. The division does not have to be 50/50. The court will determine a fair percentage and include it in the Financial Remedy Order and Pension Sharing Annex. Bear in mind some funds charge for the implementation of the pension share.
Offsetting: This is where one person keeps their pension and the other person receives an equivalent share of other assets, such as a bigger share of the family home. It’s important to take expert advice before agreeing to an offsetting arrangement as the value of a pension fund is difficult to compare with a totally different asset like property.
Pension attachment: Pension attachment or ‘earmarking’ is where a proportion of the pension benefits are paid to the non-pension holder when the pension becomes payable. Pension attachment is a complex arrangement that is used only rarely; there’s no certainty that the recipient will receive the benefit, for example, the benefit will fall away if the pension holder dies before retirement age.
What should you consider before agreeing to a pension settlement?
The starting point is to get a full valuation of all pension schemes so you know what you’re dealing with. For state pensions, you can ask for a forecast from the government showing how much you’re likely to receive when you retire. For private pensions, you’ll need to request a ‘cash equivalent value’ from your pension provider. These amounts should then be included in the Form E Financial Disclosure. A good request Form to send to your pension company is a Form P available on the Court service website, to gather this information for the Form E and ensure you’ve asked your pension provider the right questions.
Once you have this information, most clients need to take joint professional advice from a pensions actuary; they will be able to advise on what the financial result will be of a 50/50 pension share (and other percentage divisions), and (if relevant to your particular case) what an offset amount would be. They can also advise about any tax implications.
It’s also worth considering the different types of benefits that pension schemes can offers such as widows benefits.
What happens if you don’t make provision for sharing pensions in your divorce?
If you don’t make any specific arrangements for sharing pensions, then nothing will happen to them when you retire. You will receive your pension (if you have one), and your ex-partner will receive their pension. This might sound like a good thing, but it could leave one person at a significant disadvantage. For example, if one person gave up work or worked part-time to look after the children of the marriage, they may not have accrued as large a pension pot as their former partner.
On the other hand, if you don’t have a legally binding financial settlement when you divorce – recorded in a Financial Remedy Order from the Court, then the financial ties between you are not severed and you do not have a ‘Clean Break’. Your ex-partner may be able to claim against your pension in the future, and you can claim on theirs.
By far the best route forward is to obtain a Financial Remedy Order from the Court, that takes your pensions into account. This will separate your finances from those of your partner, giving you both peace of mind and certainty for the future.
If you have any questions about pension sharing in divorce, or any other aspect of family law, please contact us. We offer a free initial consultation with one of our specialist divorce solicitors who will be able to advise you on the best way forward.
Lisa Pepper is a partner and specialist divorce lawyer. Lisa can advise you on reaching a financial settlement that meets the needs of you and your family and agreeing children arrangements. Lisa works closely with the property and private client departments at Osbornes. Lisa is ranked as a leading lawyer in Chambers UK, Legal 500, Tatler, Spears 500 and Chambers HNW.
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