What Happens to My Pension on Divorce?
24 October 2017
As part of the divorce process you should obtain a Financial Order from the Court, which will determine how your pension, assets and money are distributed between you and your ex. The Courts have the power to redistribute pensions held by either person in the marriage if they decide that it’s the fair thing to do.
Will the Court Always Split Pensions in Divorce?
In England and Wales, the Court will only make an Order to split a pension if there is to be a final decree of Divorce - a Decree Absolute, which will terminate the marriage.
Nearly all separating couples choose to Divorce in this way, but there is also the option of a Judicial Separation which does not completely end the marriage, meaning that neither person can remarry. It’s worth noting that if you intend to apply to the Court for a Judicial Separation, you would not be entitled to a share of your spouse’s pension through a Financial Order.
How Will the Pension Split be Calculated?
Pensions are usually the second largest asset that has to be divided in divorce cases, after the family home. However, pensions themselves are unlike any other asset or income and because of their unique nature, the amount that each person is entitled to will need to be carefully calculated.
The percentage of the pension that would be transferred from one spouse to the other can be calculated by either the total value of the pension (this is known as the cash equivalent transfer value or CETV) or the regular income that the pension would generate for each person.
Due to the complexity of pensions, a 50:50 split will not necessarily produce an equal pension income to both people when they retire. This is because there may be a difference in life expectancy and the couple may be of different ages.
When considering how a pension should be split, there are three options:
Pension Offsetting is when the value of the pension is offset against the value of other assets held between the couple. This would mean that the Court would not make a Pension Order, and the right to the pension would remain with the pension scheme member (i.e. the original owner of the pension).
Pension Offsetting can be used when one person wants to keep the family home at the expense of any future share of their spouse’s pension that they might have been entitled to.
A Pension Attachment Order will ask the pension provider to pay a percentage of the pension to the other spouse. This will be a share of either the pension income, the pension lump sum, and/or any death benefits. This payment will be made when the pension becomes payable to the original owner (i.e. on retirement).
It’s called a Pension Attachment because the new recipient ‘attaches’ to the existing pension arrangement.
Pension Sharing is the method where an existing pension is split and divided between the couple at the same time that the Divorce takes place. A Pension Sharing Order can share the whole or part of a pension between the two people, and would provide the new recipient with their own separate pension fund. This pension can then be invested in the existing pension scheme, or a new one.
Pension Sharing Orders are the most commonly used Court Order in relation to pensions.
How financial matters are split upon divorce can be complex. In particular you may require a pension expert such as an Actuary to determine the correct percentage split. We would always advise, therefore, that legal advice is obtained before agreeing with any divorce financial settlement.