Separation – what happens to my pension?

Very few people consider their pension (or pensions) when a relationship comes to an end; breaking up is never easy and is often a very confusing and distressing time for everyone involved. It might be the very last thing on your mind, but your pension could be affected by your change in relationship.

Can my pension be included in a divorce?

Yes, pensions can and are often included as assets in divorce financial settlements. Without a good understanding of your pension entitlements, you may find that your pension benefits are significantly different to what you were expecting when you come to retire. It is therefore important to seek financial and or legal advice in this area.

Divorce, Dissolution and Separation

Whilst pensions don’t need to be shared, they should be taken into account when deciding how assets should be allocated in a divorce or dissolution of a civil partnership.  They are often a couple’s most significant asset after a house and can be easily overlooked.

There are three main options including a pension sharing order, pension attachment/earmarking and pension offsetting.  The suitability of each option is largely dependent upon the complexity of the situation and the age of the parties involved.

Pension Sharing Order

This option offers a clean break between the parties as the pension assets are split immediately with each party deciding what to do with their own share independently.

It sets out how much of your pension your ex-spouse/partner will receive, and, depending on the particular scheme, this amount can be transferred to a new or existing pension scheme or it can be retained in the original scheme – this could be beneficial if the scheme offers any guaranteed benefits or protected rights.

Pension attachment and earmarking orders

Pension earmarking is now only available in Scotland with pension attachment orders replacing this in England, Wales and Northern Ireland. 

In summary, this option redirects part or all of the member’s pension benefits to the ex-spouse/partner when it comes into payment; this does not provide a clean break as an ongoing link remains.

When the member decides to draw their retirement benefits, the amount agreed is paid to your ex-spouse/partner and the Court instructs the scheme administrator or pension provider to make these payments.

Disadvantages

  • If you die before you reach retirement, your ex-spouse/partner (or you) may not receive any payments.
  • Your ex-spouse/partner (or you) does not receive anything until you start drawing your retirement benefits.
  • If you retire early or stop contributing to pensions, your ex-spouse/partner (or you) may receive less than expected.
  • If you die after you have started drawing benefits any income payable to your ex-spouse/partner will also cease.
  • If you are the recipient of a payment, you will only receive payments at the point your ex-spouse/partner chooses to draw benefits. This may not fit in with your requirements or needs and is entirely dependent on their situation – they may never start drawing pension benefits.   
  • Your pension pot(s) may have grown substantially by the time you come to take your benefits meaning the amount paid away to your ex-spouse/partner is more than you may have anticipated.

Pension Offsetting

This option provides a clean break between all parties as assets of the same value are allocated to your ex-spouse/partner and your pension remains with you.

If you decide to opt for pension offsetting, each party retains their pension assets, but these are then offset against the other assets so if one person has a large pension, the other may receive the house assuming it holds a similar value.

It can be difficult to value some assets and as their values may change at different rates. It can be hard to split assets using pension offsetting especially as the value of a person’s pension schemes may be their most valued asset in the long term.

What if we are just separating?

If a formal divorce or dissolution is not proceeding, your pension arrangements can remain unchanged.

However, you may want to consider updating your nomination of wishes form – the people you request your pension benefits to be paid to in the event of your death.

How are my state pensions affected?

Some elements of your state pension entitlement are also taken into account on divorce or dissolution of a civil partnership; the implications will differ depending upon whether you reach state pension age before or after 5th April 2016.

  • Reaching State Pension age on or before 5th April 2016: the rules do not allow the basic state pension to be split or shared upon divorce/dissolution but you may be able to claim a basic state pension based on your ex-spouse’s/partner’s National Insurance Contribution history. However, importantly, if you remarry or enter a Civil Partnership before you reach state pension age, you lose this right. Any additional State Pension benefits such as SERPS or the Second State Pension (S2P) can be split or shared on divorce/dissolution through a pension sharing order and if granted, your additional State Pension may increase or decrease, depending on the Court’s decision.
  • Reaching State Pension age on or after 6th April 2016: if you divorce or dissolve a civil partnership on or after 6th April 2016, it may be possible to be granted a pension sharing order over part of an ex-spouse’s/partner’s ‘Protected Payment’. This is any additional State Pension benefits built up before 6th April 2016. The main element of the new State Pension is not allowed to be shared.  

If you would like any further help or advice on pension planning, please contact our team on 01903 534587.