What happens to your pension when you get divorced?

Unfortunately, divorce is a sad reality for many couples. And it is surprisingly common amongst older generations.

In 2017, the Office for National Statistics published a report, outlining marriage and divorce rates amongst adults aged 65 and over. The research revealed that from between 2005 and 2015, divorces amongst men within this age group increased by 28%; the figure rose by over a third (38%) amongst women.

As is the case with all divorces, former couples must divide up their assets. From houses and cars to living room furniture, everything must be split between the two parties. However, one element tends to be overlooked: the couple’s pension.

A pension is just as important as any other asset held by the couple and should therefore be included within the divorce settlement. However, it might not be as simple as just splitting the pension pot down the middle.

So, it is important to understand the basics about dividing a pension.

Understanding the value

First and foremost, couples must understand exactly how much the pension pot is worth.

This can be a complicated, particularly when defined contribution (DC) pension schemes are concerned, as the value of the pot can fluctuate, depending on the scheme’s investments.

In these circumstances, it is vital that former couples do not estimate the value of the pot. Instead, it would be beneficial to seek professional financial advice and commissioning an independent pension sharing report.

These reports are admittedly costly – the price can range from £1,000 to £1,500. However, it will be an incredibly useful tool throughout the process, as the report helps the divorce lawyers to better understand the former spouses’ assets and make the appropriate recommendations.

Types of division

Once the value of a pension pot is determined, the couple and their lawyers must then agree how the pot is split.

There are three main methods of dividing a pension pot. The first, and most common method is off-setting. This allows one party to take the entirety of the pension pot, whilst the other is given other assets of equal value. This could be anything from a cash lump sum to property. For some couples, this method is easier and therefore less painful than having to deal with the technicalities of pension division.

Another method involves splitting the pension between the parties. This option was first introduced in 2000 and allows the pot to be fairly divided between the two parties. This allows both parties to either move their share to a different scheme of their choosing, or leave it invested with their existing provider.

A final option for division is earmarking. This involves allocating parts of the pension fund to each party, so that that are both are entitled to some form of retirement income, once they are able to access it. However, the process of fairly allocating parts of the pension fund can be complicated and painful. Therefore, many former couples prefer to either off-set or split their pension pot.

Of course, the way in which a pension is divided will depend on the preference of the couple, the advice of their lawyers, and their financial requirements. So, consulting an independent financial adviser, in addition to legal counsel is advisable. Doing so will ensure that both parties are able to understand their various financial options and reach a mutually beneficial agreement.

Divorce is naturally a painful and complex process. But splitting up a former couple’s pension pot needn’t add further stress. Taking time to understand all options available and seeking advice where possible will certainly help to progress proceedings in the most efficient way possible.