How are pensions divided during a divorce?

Going through a divorce is incredibly hard and when the subject of finances arises, it can become even more stressful.

If you’re going through a divorce, agreeing the financial arrangements can seem like a huge task. Coming to an agreement in regard to who is entitled to what is nothing short of confusing.

Pensions are usually the largest or second largest financial asset and often one member of the party will have a larger pension than the other. For example, someone who has given up work to raise a family. The decision is then, should the pension pot be divided, or should that person receive more of another asset, like the marital home.

When it comes to dividing up pension assets, there is no simple solution. The best course of action is to have your pension reviewed by an impartial financial advisor who can help you decide the best course of action.

How do pensions get valued during divorce?

Divorce is an emotional and complex time and trying to split your financial assets can be a long process. Pensions are considered in the financial settlement and the universal valuation method for pensions is the Cash Equivalent (CE). Each party will be required to obtain a CE. While these are simple to obtain and provide a snapshot of the value of a pension, they can also be inaccurate. The calculations are done by the trustees and valued in accordance with their own rules and the value of the benefits can be very different for each individual.

Dividing pensions differs depending on where you live in the UK. In England and Wales, the total value of the pension you have built up is taken into account during divorce proceedings, not just when you were married, that is everything apart from your state pension. Yet in Scotland, it only takes into account the pension you have built up during the course of the marriage.

Methods for dividing pensions during a divorce

If you’re going through a divorce, you might be wondering about the method available for splitting a pension.

Pension sharing

This is generally the most common route in divorce courts as it gives back a certain amount of control of their finances. It allows one party to secure a percentage of the other persons pension rights and this is put into their own name.

Remember, a pension remains a pension and will be invested until that person reaches retirement age.

Offsetting

This involves balancing the pension fund against other matrimonial assets, like a house. It is worth remembering though that the value of pensions could be much higher than at the time of assessment.

Earmarking

This is when the court awards a percentage of the income from the pension to the former spouse. Sounds fair, but the income stops on the death of the pension holder or in the instance of remarrying.

Deferred lump sum order

This is an agreement that both parties will receive an agreed lump sum when the pension holder retires.

Pension attachment order

When the pension holder retires, a portion of the lump sum and pension income will be paid to the other party based on the funds value at the time.

The biggest question might be, do I really need to share my pension? There isn’t a definitive answer as it is dependent on a range of other circumstantial factors. Always seek advice regarding your pension assets and the best solution for you.

For more information regarding your pension, get in touch.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY 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. THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.