How are pensions divided during a divorce?

The ONS’ latest figures revealed that there were 103,592 divorces in 2020. Whilst this marks a 4.5% decrease compared to 2019, the data acts as a stark reminder that many couples are still taking on the difficult decision to end their marriage. And, of course, when it comes to divorce, all former couples must face the complicated process of dividing up assets.

Pension pots are often the largest financial assets most people will need to broach. With this in mind, it is important for individuals to understand how to approach dividing up one’s pension pot during a divorce.

Finding the total value

Before any formal decision is made regarding the pension division method, formerly married couples need to calculate the complete total of their pension savings. This must include all pension pots accumulated both before and after the ex-partners were married. In short, the total value must include everything but each persons’ state pension entitlement.

This might sound like an overwhelming task, so former couples might consider consulting an independent financial adviser to conduct a complete financial report to uncover any potentially lost pensions from each side. Whilst this service will come at a price (such a service usually costs around £1,000 to £1,500), it can relieve some stress from what will already be a painful time.

In an ideal world, once the total pension sums have been calculated, the pension split would be 50:50. However, factors can complicate matters; for example, one party may not have a pension at all. In which case, there may be some instances that require more complex division processes.

A fair split

There are several ways in which a pension can be divided if a straight 50:50 is deemed to be unfair.

The first option is offsetting. This is when the partner with the pension pot is able to keep the entire pension, whilst the other party receives more of the marriage assets (the value of which would equate to the total sum of the pension). This seems like a straightforward process; however, this might not be possible if the non-pension assets do not equate to the total value of the pension. Under such circumstances, alternative approaches will be required.

Earmarking – also known as a pension attachment order – might also be considered. This approach allows the party without a pension to receive income or a lump sum payment from their former partner’s pension pot in future, thereby ‘earmarking’ the pension for their benefit. However, it must be acknowledged that this approach can have some disadvantages; for example, the receiver of the income payments will have no say in the investment strategy of the pension, and if said receiver remarries, they may lose their entitlement to pension payments.

One final option to consider is pension sharing. In these cases, the partner without the pension will receive a share of the pension, which is transferred to them in their name. This will give the receiving party autonomy over their share of the pension, so they can decide to transfer their pension to another scheme if they choose. What’s more, this option also provides a ‘clean break’ for the former couple, so each party’s post-divorce activities (such as marriage or death) will not affect their share.

Divorce is always a painful process, and the complications that can emerge with dividing one’s pension pot can add another layer of stress to proceedings. However, by ensuring all parties understand the various options and seek advice where necessary, former couples should be able to achieve a fair pension settlement.