Pension and divorce – the basics

For many couples, the combined value of their pensions are often their second-largest asset, after their home.

This means they are likely to form part of the financial settlement if the couple divorce.

Since 2000 the two preferred options for divorcing couples are pension sharing and pension offsetting, as both of these provide the chance for a ‘clean break’.

Pension sharing

In England & Wales all pension assets belonging to the couple are taken into account on divorce (regardless of whether these assets were built-up during the period they were married)

If pension sharing is used in your divorce settlement, a ‘pension sharing order’ will set out how much of a pension must be given to you (or your ex-spouse).

After the sharing order comes into effect, the receiving spouse of the member will own the pension in their own right, and this means that they manage it as they wish, thus offering the ‘clean break’ from their ex-spouse.

The amount of pension to be transferred is expressed as a percentage of the pension’s fund value (or the cash equivalent transfer value (CETV) if transferring from a final salary scheme), rather than a monetary amount.

This can cause issues because the fund value (or CETV) can change significantly during the time the divorce is being finalised. Therefore, the monetary amount actually received could be more or less than was expected.

A pension sharing order can apply to personal pension, workplace pension or final salary pension, but not the state pension.

They also can’t be applied to pensions the member is receiving as a spouse, civil partner or dependant, or pensions already subject to an earmarking or sharing order from a previous divorce.

Pension Offset

A pension offset is where assets of the same or similar value are allocated to the ex-spouse and the pension remains with the member.

This may be an appropriate option if the pensions are of low value, or if it is an overseas pension (as these cannot be shared via a UK court order).

This option also provides a clean break between all parties.

Pension Attachment Order

A Pension Attachment Order is where one of the divorcing couple receives some of the ex-spouse’s pension when it starts being paid to them. This could be some of the tax-free lump sum or the pension income (or both).

The main drawdback with a Pension Attachment Order is that the receiving party won’t get access to the pension payments until their ex-spouse decides to start taking the benefits from their pension, therefore this doesn’t provide the clean break available with the other two options.

Please note: This blog is for general information only and does not constitute advice. The information in this article and all others in The Learning Hub is aimed at retail clients only.