Making arrangements for your finances during divorce can often prove to be a complex process. In many cases, the way your pensions are divided will be especially important, as they are likely to be among your most valuable assets and will provide future financial security for you and your family.
There are a number of options available to you and your former partner when it comes to dividing pensions in divorce. The option that is right for you and your circumstances will depend on a number of factors, including the existing financial disparity between you and your former partner, and whether a ‘clean break’ would be beneficial.
In every case, it is important to note that, even where you already have good understanding of your finances, reaching an agreement for your pensions can be an incredibly difficult process. Pensions, and the various options available to separating couples, can prove to be a minefield, and should not be handled without expert professional advice.
Here, we discuss how pensions can be divided in divorce, as well as the processes that need to be followed to secure an outcome which ensures your financial interests are firmly protected.
What are the options for dividing pensions in divorce?
When dealing with pensions and divorce, there are typically three main options for couples, these being:
- Pension sharing
- Pension offsetting
- Pension earmarking/pension attachment orders
Deciding on how to handle pension division in divorce is never likely to be a simple process, even if you have some existing awareness of the complexities of your finances. This is something our experienced divorce and pension solicitors can support you with.
Pension sharing is a viable option if you are seeking a ‘clean break’ with your former partner. This means that you will not have any ongoing financial ties or responsibilities towards one another.
Pension sharing will typically see one partner divide a percentage of their pension benefits with their former partner. The benefits can be placed into a brand new pension scheme by the receiving partner, or they can retain them separately within the original pension scheme.
The Court issues a Pension Sharing Order (PSO) which states exactly how much of the pension the receiving partner is due to gain. The amount will be expressed as a percentage of the transfer value of the pension that is due to be split.
The receiving partner will gain a ‘pension credit’, while the sharing partner will gain a ‘pension debit’.
This is often a desirable option for dividing pensions in divorce, especially where one spouse does not have an existing pension, or the value of their pension is significantly lower than their partner’s.
Despite this, pension sharing is still a very complex process. An agreement may be possible, especially if you and your former partner are on amicable terms, but this is not a process which should be explored without expert legal advice. Our divorce and pensions solicitors will be able to support you with pension sharing when instructed.
As the term suggests, pension offsetting sees the value of a pension being ‘offset’ against other assets. For example, this might mean that one party will be able to keep their pension, and, in return, the other party will receive a greater share of any other assets that are present, such as the family home.
Someone who receives a divorce pension payout via offsetting would benefit from this approach if the pension in question is small, meaning pension sharing is less viable.
There is an inherent risk to offsetting when it comes to pensions in divorce settlements, however. One party could be left with little or no provision for their own retirement and some assets may be difficult to accurately quantify as their value will change at different rates over time. Legal advice is therefore essential before you decide on such an agreement.
Pension earmarking/pension attachment order
Pension earmarking, also often referred to as a pension attachment order, sees one party pay their former partner lump sum payments from their pension. The pension benefits are therefore essentially ‘earmarked’ for the future.
This method of dividing pensions in divorce does not create a clean break between the parties, which can create its own set of complications. Furthermore, the partner who does not own the pension will face a range of disadvantages if they opt for this type of divorce pension payout:
- They will have no control over any investment decisions made by the pension holder
- They will need to wait until the pension holder chooses to withdraw their benefits, retires, or dies
- If they remarry, they may lose their right to a future pension
How are State Pensions handled in divorce?
According to the State Pension system, individual State Pensions cannot be shared upon divorce or civil partnership dissolution by anyone who has reached their State Pension age after 6 April 2016.
That said, under current rules, if one partner has made enough National Insurance contributions, this could increase the State Pension the other receives (providing they do not remarry or enter a civil partnership before their State Pension age).
Neither the old basic State Pension nor the new State Pension can be shared from 6 April 2016 onwards. However, the court can issue a 'pension sharing order' following divorce, meaning you or your former partner may have to share any extra State Pension entitlement you have accumulated.
Can pension division in divorce be decided voluntarily?
Yes, it is possible to make a voluntary agreement on how pensions are divided in divorce. In fact, in most cases, divorcing couples will be strongly encouraged to seek a voluntary divorce settlement in an amicable manner.
There are a number of ways for this to be achieved. For instance, mediation sessions can be held, or an agreement can be reached following private negotiation. If a voluntary agreement is found and both parties are ready to proceed, a Consent Order can be applied for which will make the terms of the agreement legally binding.
However, it is important to note that a voluntary agreement is not always possible or appropriate, especially where there are high value pension assets or issues such as domestic abuse to consider. In such cases, it may be necessary to apply for a court to decide the division of pensions, in which case having the right expert legal support is absolutely essential.
What happens if you cannot agree on pensions in divorce settlements?
When there are substantial assets involved, and coming to an agreement over pension division in divorce is simply not possible, the court may see fit to issue a divorce financial order. This means that the court will decide how pension assets will be divided, as well as other assets such as property and savings.
They will take various factors into consideration before making a decision, such as the financial needs of both parties, the income and earning capacity of both parties and the welfare of any children involved in the relationship.
Why speak to a solicitor when making pension arrangements during divorce?
As we have discussed, the rules and options for dividing pensions during divorce are extremely complex. Putting the wrong agreement in place, or agreeing to terms that are not favourable for your circumstances, can have a huge impact on your finances.
We would therefore strongly recommend that you seek out legal advice from an expert divorce and pensions solicitor as soon as possible so you have a comprehensive understanding of your options moving forward.
Consult our divorce and pensions solicitors in Banbury, Bicester and Rugby
If you would like to speak to a solicitor with high level expertise in supporting people with pensions and divorce, please do get in touch.