How will a Divorce affect your Pension?

Navigating the complexities of divorce and pensions can be a daunting task, especially when you’re dealing with the emotional upheaval of separation. Yet, understanding how your financial landscape may change post-divorce is crucial to securing your future.

According to Harbor Family Law, the average divorce rate in the UK as of 2021 is 42%. No matter the circumstances of the divorce, tense or amicable, the financial consequences can be severe. Therefore, it is essential to be aware of what is considered a joint marital asset in the case of divorce. Many are surprised to learn that pensions are included in the ‘matrimonial pot’.

In England, Wales and Northern Ireland all pensions – other than the basic state pension – are included regardless of whether they were built up before or during the marriage.
In Scotland, only the value of your pensions built up during the marriage is included.

Couples experiencing divorce can form their financial agreements independent of the court. It will need to have a legal format; therefore, consulting a professional is advised.

What are the Settlement Factors considered by the Court?

There are several pension options that the court may deem suitable for splitting pensions. These include pension offsetting, an attachment order and pension sharing.

During divorce proceedings, the court aims for a fair and equitable settlement. This doesn’t necessarily mean a 50/50 split. The course will consider:

Who has custody of any dependent children
The duration of the marriage, and the portion of the pension built up before marriage.
Respective contribution to the marriage, including raising children.
What is the age of your ex-partner? Could they work to rebuild suitable wealth?

Splitting Pensions The Different Types of Pension Splitting

Pension Offsetting

This option doesn’t split the pension – instead, it uses the current lump-sum valuation of the pensions and offsets it against the value of other assets. For example, you would be entitled to a greater share of the family home. This option requires there to be sufficient non-pension assets to cover this offsetting.

Attachment Order

This option provides the partner without the pension, income and/or lump sums from the pension in the future. The court can also rule that, as a result of the divorce, some or all of the pension’s remaining funds are paid to the other partner if the pension holder dies.

As the pension is still under the control of the pension holder, the disadvantages for the non-pension holder include:

No control over where the pension will be invested.
No control over when you receive the pension benefits – you must wait for your ex-partner to start withdrawing from the pension.
If your ex-partner takes the benefits earlier than expected or makes fewer contributions than expected, you will receive less than expected.
If your ex-partner dies, you may gain access to the pension benefits or lose rights to it.
If you re-marry, you may lose the right to the pension
The ex-partner pays tax on the full pension income, even yours – the ex-partner may have a higher tax rate than you would’ve paid.

Firstly, this option splits the pension benefits simultaneously with the divorce. The non-pension holder is transferred a share of the ex-partner’s pension benefits. They may then be able to choose whether to keep these benefits in the existing scheme or transfer them to a new scheme.

Pension sharing allows both partners to know exactly what they’ll receive, alleviating potential tensions over this, and allowing a ‘clean break’. As these pensions have been separated from each other, the death or remarriage of one of the ex-partners has no impact on the other.

However, both parties are liable to pay tax on their pension incomes at their respective tax rates.

How can we help?

At Carpenter Box Financial Advisers, we have experience dealing with pensions and retirement planning following a divorce. We can help you quantify your retirement goals and objectives and develop a strategy to work towards them, including claiming any pensions rights you have been granted as part of a divorce settlement.

Your financial plan can be personalised to your current and expected future circumstances and will include investments which are suitable for you. Our ongoing review services will ensure your plan is continually tailored to your circumstances and adjusted to factor in any planned (or unplanned) life events.

If you would like to discuss pensions and retirement planning, or your finances generally, please contact us on 01903 534587 or via email.

Pensions are typically invested in market-based funds. The value of your investments can go down as well as up and you may get back less than you invested.

Gill Lynes Director - Later Life Advice Contact Gill Lynes >