When a couple divorces, there are some financial assets that naturally get most of the attention.
Who keeps the house? What happens to the savings? How will the mortgage be dealt with?
But there’s another asset that can be just as important – and in some cases worth more than the family home: your pensions.
Pensions can easily be overlooked because they don’t feel like money you have today. You can see the value of a house and the balance in a savings account, whereas a pension may not be accessible for many years.
That doesn’t make it any less important.
In fact, decisions made about pensions during a divorce could have a significant impact on the lifestyle both people can afford later in life.
So, what actually happens to your pension when you divorce?
Are pensions included in a divorce settlement?
Yes, pensions should be considered alongside other financial assets when working out a divorce settlement.
That doesn’t automatically mean your pension will be divided 50/50, or even that it will be divided at all. The appropriate outcome will depend on the circumstances and the overall financial settlement.
The rules also differ between England and Wales, Scotland and Northern Ireland, so legal advice is particularly important.
One of the biggest mistakes can be concentrating entirely on the assets you need now.
For example, keeping more of the equity in the family home might initially feel more valuable than retaining pension benefits. But property and pensions are very different assets.
A house provides somewhere to live, while a pension may eventually need to provide an income for potentially decades.
That future income shouldn’t be forgotten simply because retirement still feels a long way off.
What is a Pension Sharing Order?
One way pensions can be dealt with is through a Pension Sharing Order.
Put simply, this allows a percentage of one person’s pension benefits to be transferred for the benefit of their former spouse or civil partner.
The person receiving the share gets what is known as a pension credit, while the original pension holder has a corresponding pension debit.
The significant point is that the pension benefits are then separated. Each person has their own pension entitlement and can make decisions about their benefits subject to the rules applying to their pension.
This can help provide a cleaner financial break than arrangements where one person’s future retirement income remains linked to the other’s pension. (MaPS)
However, pension sharing can be complicated, particularly where valuable defined benefit pensions are involved, so it shouldn’t be viewed simply as moving a percentage from one pension account to another.
What about pension offsetting?
Pension sharing isn’t the only possibility.
Another approach is pension offsetting.
This means the pension itself isn’t divided. Instead, its value is taken into account when other assets are divided.
Imagine, for example, that one person has a substantial pension while the couple also owns a valuable property. They might agree that one keeps more pension benefits while the other receives a greater proportion of the property or other assets.
On paper, this can look straightforward.
In reality, comparing £200,000 of pension with £200,000 of property isn’t necessarily comparing like with like.
A pension may not be accessible for years, its benefits may be taxable when eventually taken, and it may provide valuable guarantees. A house, meanwhile, can be lived in or potentially sold.
This is why looking only at the headline values can give a misleading picture. (MaPS)
How do you know what a pension is worth?
This is where things can become more complicated.
For divorce purposes, pension schemes can provide a Cash Equivalent Transfer Value (CETV). This gives a monetary value to the pension benefits.
For some pensions, that may provide a reasonable starting point. For others, the headline CETV might not tell the whole story.
Factors such as guarantees, inflation protection, survivor benefits and the type of scheme can all be relevant.
Where pensions are particularly valuable or complex, specialist pension-on-divorce expertise may be needed to help establish how the benefits compare and what different settlement options could mean for each person’s future retirement income. (MaPS)
Defined contribution and defined benefit pensions are very different
Understanding what type of pension you have is particularly important.
A defined contribution pension is essentially a pension pot. Contributions are invested and the eventual value will depend on factors including how much has been paid in, investment performance and charges.
A defined benefit pension, sometimes referred to as a final salary or career average pension, works differently. Instead of simply having an investment pot, it promises retirement benefits calculated according to the scheme’s rules.
That income may also have valuable features attached to it, such as increases to help protect against inflation.
This means a defined benefit pension with a particular transfer value shouldn’t automatically be regarded as equivalent to a defined contribution pension displaying the same value. (MaPS)
Understanding what the pension will actually provide can be just as important as knowing the number written on the valuation.
Don’t forget your pension beneficiaries
Once the financial settlement has been agreed, there is another important piece of pension housekeeping that can easily be missed.
Check who you’ve nominated to receive your pension benefits if you die.
Many pension schemes allow you to complete an expression of wish or nomination form telling the trustees or provider who you would like to receive any available death benefits.
If you completed yours years ago when you were married, your former spouse may still be named.
Divorce is therefore a good opportunity to review your pension nominations and make sure they still reflect your wishes. It’s also sensible to review your will and wider estate planning at the same time. (MaPS)
Divorce changes more than your relationship status
The end of a marriage can fundamentally change a financial plan.
Instead of planning for one household and one retirement together, there are now two separate futures to consider.
Your income may have changed. Your housing costs could be different. You may have received or given up pension benefits. Your savings and investments may have been divided. Your retirement plans might need to change completely.
Perhaps you were planning to retire at 60 together. Does that still work?
Maybe you expected your spouse’s pension to provide a significant proportion of your household retirement income. What will your own income now look like?
Or perhaps you’ve transferred part of your pension under a Pension Sharing Order. Are you still on track for the retirement you wanted?
These are questions that often can’t be answered simply by looking at today’s pension balance.
Rebuilding your financial plan after divorce
Once the legal and financial settlement is complete, it can be useful to effectively start your financial plan again.
Look at where you stand now, rather than trying to continue with a plan designed for your previous circumstances.
That could mean reviewing:
- your pensions and projected retirement income
- savings and investments
- monthly expenditure
- mortgage and housing costs
- emergency savings
- protection policies
- beneficiaries and estate planning
- your planned retirement age
- how much income you might need in retirement.
Cashflow modelling can also be particularly useful at this stage.
Rather than simply asking, “How much pension have I got?”, you can begin asking more meaningful questions:
“What does my financial future look like now?”
“Can I still retire when I planned?”
“Will my money last?”
“What could I change today to improve my position?”
Those questions can turn an uncertain situation into something much more tangible.
Your pension shouldn’t be an afterthought
Divorce can involve a huge number of decisions, and pensions may understandably feel less urgent than finding somewhere to live or working out immediate household finances.
But overlooking them could have consequences that aren’t felt until many years later.
Your pension may be one of your largest financial assets, so understanding what you have, what it could provide and how any proposed settlement could affect your future is important.
A solicitor can advise on the legal aspects of your divorce and financial settlement, while specialist pension and regulated financial advice can help you understand the longer-term financial implications.
At Lazenby’s Financial Services, we believe financial planning is about much more than looking at a pension statement.
When life changes, your financial plan needs to change with it.
If you’re going through a divorce or have recently completed one, reviewing your pensions, investments and retirement plans can help you understand where you stand and what your next chapter could look like financially.
Divorce may change the plan – but it doesn’t mean you have to stop planning for the future.
This article is for general information only and does not constitute legal or financial advice. Divorce and pension rules vary across the UK and individual circumstances differ. You should seek appropriate legal advice regarding a divorce settlement and regulated financial advice where required.
