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Finances are always scrutinised when a marriage or civil partnership ends. A pension can be an important financial asset and will be included as part of the overall financial settlement agreed between you and your partner.  

If divorce is something you are considering in the future or something you are going through right now, any pensions held between the two parties will need be taken into consideration. This will usually be one of the largest financial decisions you will need to make. 

For the benefit of doubt, throughout this article we will use the term divorce to cover both the ending of a marriage and/or a civil partnership. Likewise, we may interchange between the terms; ‘marriage’ and ‘civil partnership’ – the rights between ex-spouses of marriage or a civil partnership are the same where divorce and pensions are concerned. 

Divorces can be extremely traumatic for any family and agreeing a fair financial settlement isn’t straight forward with each party undoubtedly wishing for a fair result.  

The easiest place to start from when considering a fair financial settlement is a 50/50 split, but this can be adjusted if a fair outcome isn’t achieved. It is also worth noting that a 50/50 split of “capital” when it comes to pensions rarely results in equality of income in retirement, so this will also need to be considered.  

Should your divorce settlement end up being decided in court, the courts will indeed seek to achieve financial fairness. Every divorce settlement is of course different and the treatment of any pensions will also be different from case to case. If you and your ex-partner have your own pensions, and are comfortable with your finances, they could be ignored altogether. 

However, during a divorce settlement, pensions can be taken into consideration in one of three ways; 

  • Offsetting
  • Attachment Order 
  • Pension Sharing 

 

Offsetting 

Here, the value of any pension is offset against the other assets owned between you and your ex-partner. You would keep your pension; however, your ex-partner will receive a greater share of the other assets owned between the two of you. Any pension benefits are valued as a lump sum in today’s terms. 

If there aren’t enough non-pension assets owned between you and your ex-partner in comparison to the value of a pension, offsetting will not be an option for you. 

Attachment Order

This is a process where the partner without the pension is allowed to receive income and/or lump sum payments from the pension in the future. Pension benefits are said to be earmarked for their benefit. 

A court can also order that some or all of any survivor pension and/or lump sum death benefits must be paid to the other partner should the pension policy member die. 

There are several cons to this if you are the one without the pension, these include; 

  •  You have to wait until your ex-partner retires, takes their benefits or dies before you can receive your earmarked benefits. 
  • You have zero control over any investment decisions your ex-partner makes with the pension funds. 
  • You could potentially receive less than you expected if your ex-partner stops contributing to the pension or takes their benefits earlier and retires. 
  • If your ex-partner dies or you re-marry, you may lose your right to a future pension. 
  • Any income taken from the pension and paid to you is taxed at the rate of the policy holder, if your ex-partner has a higher tax rate than you, you could receive less than expected. 

 

Pension Sharing 

This is deemed a clean break in terms of pensions and divorce. You and your partner will know at the time of divorce how much you are to receive, keep or lose. 

This works by splitting any pension benefits at the time of the divorce. The partner without the pension receives a share of the pension benefits by way of transfer into their own name. Depending on the pension scheme, the partner receiving the pension benefits can choose to keep their pension in their existing scheme or transfer it to a new pension. 

Both partners will pay tax on their pension income received from their share of the pension at their own rate of tax as/ when they draw benefits. 

State Pension 

From 6th April 2016, neither the old basic State Pension nor the new State Pension can be shared. If you get divorced and a court issues a ‘pension sharing order’ you or your ex-partner may have to share any extra State Pension entitlement you/they have built up such as an additional State Pension. 

Pensions alone can be rather daunting for anyone to try and understand completely. The same can be said about the divorce process. This is where seeking the help of experienced professionals can help. Hopefully the above has laid to rest any thoughts you have about your current or potential future position regarding your pension where divorce is concerned. 

Should you wish to discuss what your pensions options are pre or post-divorce, please do not hesitate to speak to a member of our team. We would be more than happy to help.