Statistics tell us that 40% of people retiring have been divorced. If you are divorcing, it’s important not to forget pension assets in your financial settlement. But how do you value a pension? Does splitting a pension depend on how long you were married? And how exactly do you split a pension on divorce? This guide answers these questions and lots more.Keep reading for your complete guide to divorce and pensions.
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Why is a pension taken into account in a divorce?
If you’re separating, then agreeing a financial settlement will be one of your key concerns. Assets such as your home, your savings and your investments may be a key part of such an agreement, but it’s also important to take any pension benefits into account.
Final salary pensions – sometimes called ‘defined benefit’ schemes – have, for many, increased in value in recent years. When valuing your spouse’s pension, you can use the widely agreed ‘30 times annual income’ approach. That means a final salary pension which pays out £15,000 a year, multiplied by 30, will be worth in the region of half a million pounds. As a single asset this could, in fact, have a larger value than the family home.
Remember also that if you’re a divorcee, you may no longer be able to rely on your ex-spouse’s National Insurance contributions for your state pension. If your own state pension is not fully paid up, it’s possible to ‘buy extra years’ to make up the difference. You only need to be retired and claiming your pension for a few years before you start gaining more back than you paid in.
How do you value a pension in a divorce?
The law surrounding pensions is complex and working out the value of a pension in order to make a financial settlement requires legal advice. In general terms, the amount of pension that will be taken into account when drawing up a settlement will be based on:
- How long each party has been paying into their pension scheme
- The length of the marriage
- Whether pensions were accrued prior to the marriage and/or after your separation.
When assessing the value of a pension on divorce the court can consider the pension Cash Equivalent Transfer Value (CETV). This figure can be obtained from your pension administrator, but it may take up to six weeks to obtain.
In some circumstances, the CETV is the correct value to achieve a fair valuation of pension benefits. In other cases, you may need to instruct a specialist pension actuary to revalue the pension rights. For example, someone in a final salary pension scheme could leave their employer and terminate their membership of the scheme.
Getting a valuation of a pension is often a necessary step crucial in agreeing any settlement, irrespective of how you’re planning to share the pension assets.
Are pensions always split 50/50 in a divorce?
No. There is no legal requirement for pensions to be split equally between both parties. Later on this page, we look at reasons why a pension may not be split equally; such as if the marriage is short, or if the pension was accumulated prior to the marriage.
In some cases, a 50/50 split does not necessarily mean both parties receive equal income. For example, you might agree with your ex-spouse that you want to split the pension so that both of you receive an equal pension income when you retire.
In this instance the split of the pension pot would not necessarily be 50/50. This is because annuity rates vary for men and women as life expectancy is different. Women generally live longer, meaning they will receive a greater pension income in total. This may require a larger split of the pension fund.
Typically, a couple will agree a compromise figure that may also be influenced by how other assets in the marriage are divided.
Would a pension accumulated before getting married be shared when I divorce?
In England and Wales, all pension assets accumulated by the couple can be taken into account when agreeing a financial settlement. However, in practice, pre-marital pension assets are often considered separately.
If the couple agree to treat the pre-marital pension separately, an example may then be as follows:
A husband has accumulated a pension worth £100,000 over 20 years but was married for only 10 of these years. This means that, generally speaking, £50,000 of the value could, as a starting point, be taken into account in the divorce settlement.
His wife has a pension worth £10,000, all accrued during their marriage.
If the pensions accumulated during marriage were to be split equally, the wife would receive 40% of the husband’s pension (£20,000) added to her own £10,000. This means that each party would receive £30,000.
The husband would also retain the £50,000 pension accumulated outside the marriage. Of course, it’s entirely possible that the wife has then agreed a larger share of other assets in the marriage to formulate a more even overall split.
Each case is different, and so the division of pension assets may not follow this pattern.
Would a pension be split if I divorced after a short marriage?
Again, this depends on your specific circumstances.
A ‘short’ marriage is generally considered to be one that has lasted five years or less, although pre-marital co-habitation in a settled relationship may be taken into account.
If your marriage has been short and there are no children, it’s common for a financial clean break to be undertaken. This ensures that neither of you has any further interest in the financial affairs of your ex-spouse. Here, you will generally divorce taking with you what you brought to the marriage.
It is unlikely that your entire pension pot will be split, if at all. However, if either party has made sacrifices – for example giving up a property or career – this may be considered when any settlement is made.
How do I share a pension when I divorce?
As pensions are often one of the biggest assets in a marriage, it’s important to take them into account during any financial settlement made on divorce.
Research by Prudential has also found that divorcees retiring can expect to receive up to 18% less in income when they retire than non-divorcees, so ensuring pensions are split fairly is important.
There are three main ways in which pensions can be split on divorce:
- Pension sharing order (PSO) – here, the court will issue a PSO which states how much of your pension your ex-spouse is entitled to receive. It is a formal agreement and the receiving party can become a member of the existing pension scheme or they can transfer the value to a new pension provider. It offers a clean break as the pension assets will be split.
- Asset offsetting – under this method, the whole pension is taken by the party who has been paying in (typically the husband). The other spouse is given other assets such as property or cash of equivalent value.
- Pension attachment order – here, when you start drawing your retirement benefits, part or all of these are paid to your ex-spouse. The court orders your pension scheme administrator to make these payments to your ex-spouse, or from them to you. There is no clean break with this option, and your income is likely to cease on the death of the person holding the pension. In addition, the pension entitlement could end if you’re the recipient of the earmarking order and you remarry (see the section below about remarrying).
What happens to my state pension or additional state pension if I divorce?
Your state pension entitlements on divorce will depend on which state pension you receive.
- The basic state pension – your basic state pension can’t be shared on divorce. However, you may be able to use your former spouse’s National Insurance contributions to increase your basic state pension. The other party’s state pension entitlements won’t be affected.
- An additional state pension – here, the court can order that this is shared between both parties on divorce. You will lose these rights if you remarry.
- The new state pension – the new state pension can’t be shared on divorce. If you do have a ‘protected payment’ then the court can order that this is shared.
What if I divorce after I retire?
If you divorce after you retire pensions can still be split. However, you can’t take a lump sum from your ex-spouse’s pension if they’re receiving an income from it.
Options including pension sharing and offsetting remain available to you, although the rules can be more complicated.
What if my ex-spouse remarries or dies?
This depends on the method you choose to split your assets.
Pension sharing creates a clean break between you and your ex-spouse. This means that there are no consequences if either party remarries or dies. Your former spouse has no further claim on your pension assets but has pension benefits in their own right.
Similarly, if your ex-spouse took a pension and you took other assets then their death or remarriage won’t affect your retirement income.
Would a pension be split between cohabiting couples?
If you are not married or in a civil partnership, then your pensions won’t be split if you go your separate ways. There is no legal obligation for one of you to financially support the other if you separate.
Currently, pension sharing orders and earmarking orders are only available to couples who are married, not couples who are cohabiting.
The information on this website is to be considered a guide and is therefore not legal advice. You use this information with the understanding that Wiselaw does not accept liability for any direct or indirect losses as a result of anyone relying on or acting upon the information on this website. Whilst we endeavour to provide accurate information, Wiselaw does not accept liability for any errors or omissions on this website.