Pensions and Divorce

Pension have to be a major consideration in a divorce settlement, since it may actually be one of the largest assets you have - it could be worth even more than your home. The courts have long had the power to take pensions into account in dividing up the matrimonial assets, and very often the husband might have a substantial pension provision and the wife might have none or a very limited pension provision because, for example, she has given up her job in order to look after the children. Of course, it may be that both spouses have similar pensions or the wife may have a larger provision than her husband.

How to divide a Pension?

When splitting a pension, there are three methods that may be used to help assess how your marital assets should be divided:

1. Offsetting

Under Pension Offsetting the value of the pension is ‘offset’ against the value of other assets within the marital pot, usually the matrimonial home, savings or investments. The value of all assets are calculated, and then traded off against another as fairly as possible. However, sometimes it can be difficult to achieve a fair balance using this method, as the pension pot normally has the greatest value, and there may not be enough assets to balance against it.

2. Attachment (previously known as earmarking)

Pension attachment is the method of earmarking a proportion of the income stream, the lump sum or death benefit of a pension without bestowing any rights of ownership to the ex-spouse. It is merely the right to receive an income or lump sum benefit upon divorce. This method is probably the least frequently used, as it can be extremely complicated. In this arrangement, when one party's pension eventually comes into payment, a portion of it will be paid to the other party.

This method is not ideal for those looking for a clean break, since the ex-spouse will have to wait for their former partner to retire before receiving any money. Also, only the spouse with the pension can make any decisions about investments, and the benefit may be lost if the spouse without the pension remarries or the pension holder dies before retirement.

3. Sharing

Pension sharing is the method by which an existing pension is physically split and divided for the purposes of divorce. As the splitting of benefits is done immediately (rather than waiting for retirement for ownership of the benefit) this offers couples a clean break. It can be applied to all pensions regardless of whether the pension is in payment or not (only except the basic state pension). It means the ex spouse gets a pension in their name and under their control and the existing member has no further access to or ownership of these benefits.

When looking at pension sharing you should always consider potential costs. They might include actuarial valuations, the implementation of the pension sharing order and the costs of financial advice.

The Pension Sharing Order normally takes effect from the date on which the Decree Absolute of Divorce or nullity is pronounced.

How Divorce Affects a State Pension

If you divorce, you may still be entitled to use the National Insurance (NI) record of your former spouse to increase your basic State Pension. You can do this for all the tax years in which you and your former spouse were married, and up to the year in which you attain state pension age. However, if you later remarry (before you reach state pension age), then you will lose your right to claim on your former spouse’s NI record. You can only retain your claim if your re-marriage takes place after you reach state pension age.

Also, you may be entitled to a share of your former spouse's State Second Pension or State Earnings-Related Pension Scheme if the court decides it should be shared as part of your financial settlement on divorce.