Splitting a pension on divorce – here’s what you need to know

No one wants to think about the prospect of a marriage ending, but unfortunately it is a sad reality for many couples in the UK. Indeed, according to NimbleFins, around 1 in 3 (31.8%) marriages ended in divorce between 1964 and 2019.

Divorce is obviously an enormously emotionally unsettling time, and there’s no shame in seeking the support of family, friends, and even professionals to help you manage your feelings throughout this period.

Beyond the emotional side of things, divorce is also a logistical issue, particularly from a financial perspective. Working out how to equitably divide your money to reach a fair outcome for both parties is a crucial part of the process.

However, this often revolves around assets that are easy to think about, such as savings or a shared property. Meanwhile, other elements such as pensions are sometimes given a backseat.

This is often an oversight for divorcing couples, especially as many will seek to amicably divide their wealth in as fair a manner as possible.

So, find out what you need to know about splitting a pension on divorce.

Less than 13% of divorces see pension assets divided

When divorcing, you might think that the marital home is the most valuable asset, and the most coveted as a result.

Yet in fact, figures from the Office for National Statistics (ONS) looking at household total wealth between April 2018 and March 2020 – when data was last available – show that private pensions have become the largest component of total wealth over the past 14 years, with property in second place.

But despite the immense wealth contained within retirement funds, figures published by FTAdviser show that pension assets are split in less than 13% of divorces.

This means that, while couples might be splitting property, savings, and other investments, the largest asset on average is only being divided in around 1 in 8 of instances.

There are many methods of dividing pension assets

One of the major factors that might put couples off from attempting to divide pension assets is that it could be complicated.

While it’s true that parting pension funds is more complex than taking the value of a savings account and splitting it down the middle, it’s still more than possible to do.

Generally speaking, there are three main ways that you might divide a pension on divorce. These are:

• A Pension Sharing Order (PSO) – perhaps the most common and straightforward method, a PSO involves pension assets being split at the time of divorce. It normally sees one party receive a “pension credit” from the other party. Each couple can then continue to build up their pensions independently moving forwards.
• A Pension Attachment Order – this method, also known as “pension earmarking”, involves one partner receiving part (or all) of their ex spouse’s pension benefits when it comes to be paid. This method requires the couple to remain in contact and can be difficult for the partner receiving the pension credit as it will only be paid when the other party starts to draw their pension. The recipient has no control over their income.
• Pension offsetting – rather than dividing pension assets, the spouse or civil partner with the smaller pot may receive a larger proportion of other divided assets. For example, if the pension and property assets were similar in value, one party might choose to take the property while the other takes the pension.

Of course, the most appropriate option for you will depend on you, what you want to achieve with your pension split, and the personal circumstances of your divorce.

Working with a financial planner can help you reach a fair outcome

When divorcing, it can be sensible to work with a financial planner, helping you to find the right option from the ones listed above and reaching a fair outcome that all parties are happy with.

A planner can facilitate conversations and create an open dialogue so that everyone understands what’s going to happen and why. Within this, they can take you through all your options, explaining difficult concepts in simple language to ensure you fully understand the range of choices you have available.

They can also look at the possible value of pensions to ensure that you receive a fair division of assets.

Perhaps most importantly of all, your planner will be able to help you come to an agreement with your future goals in mind.

The purpose of your wealth is to help you live the lifestyle you want. So, when dividing your assets, your planner will be able to show you the impact of the choices you make on your ability to reach your targets.

By factoring this in, you can be confident that you’ll both be financially stable and secure for the future, which is ultimately what everyone involved really wants.

Speak to us

If you want to find out more about how financial advice can help protect everyone involved during divorce, you can download this guide for free on our website. Written by the Financial Vulnerability Taskforce, the guide contains everything you need to know about divorce, including:

• Key financial facts about divorce
• How divorce can lead to individuals being in vulnerable circumstances
• Details of the process of divorce, including mediation and court
• The role of professionals, including solicitors, barristers, and more.

At Rosebridge, we can help you navigate the complex effect of divorce on your finances. So, if you’d like to discuss dividing a pension on divorce or any other financial planning topic, please do get in touch with us today.

Email enquiries@rosebridgeltd.com or call 01204 300010 to speak to our experienced team.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

Workplace pensions are regulated by The Pension Regulator.