Divorce affects about 42% of marriages[14]., yet couples often forget about their pensions during settlement talks. These retirement savings can greatly affect both partners’ financial future since they often represent decades of accumulated wealth and in some instances may be the only asset or most significant asset.
Splitting retirement money in a divorce feels daunting, especially when you’re dealing with pension division. The process becomes even more complex with different types of pensions – from private plans to state benefits. Many couples want to know what impact a divorce may have upon their pensions and or whether they are entitled to a share of their spouses pension assets.
Understanding Your Pension Rights During Divorce
Couples going through divorce proceedings need to understand their pension rights first.
Types of pensions subject to division
All pension provision will be considered as part of your divorce, this would include:
- Personal pension schemes
- Workplace pensions
- Self-invested personal pensions (SIPPs)
- Additional State Pension benefits
- Stakeholder pensions
The Court cannot however make a pension sharing order in respect of a pension that is already subject to a pre-existing pension sharing order. Further a pension sharing order cannot be made in respect of: Basic state pension; overseas pensions; a widowers pension in payment or state retirement benefits.
Courts in England, Wales, and Northern Ireland look at the total value of all pension rights, whatever time they were built up [1]. The court may consider excluding pension accrued outside of the marriage, however this will only be in such cases where there are sufficient pensions on both sides to meet needs. There is however no guarantee the pension assets may be apportioned in this way and this is an area of ongoing legal debate. Scottish courts only look at the value of pensions accrued during the marriage or civil partnership [1].
State pension vs private pension considerations
Private and occupational pensions can be shared, but as noted above, the simple State Pension cannot be divided during divorce. The additional State Pension built up before April 2016 can be shared through court orders [1].
Private pensions work like this:
- The courts will expect both parties to provide full disclosure of their pensions assets, whenever accrued for consideration as part of the financial proceedings.
- When considering the appropriate pension share, the court can consider those pension assets accrued both during or before the marriage [2]
- UK and overseas pension funds must be part of the disclosure to be taken into consideration – even if an order cannot be made in respect of the overseas fund
Time limitations and legal requirements
You can make pension claims anytime before a final financial remedy order has been made – whether by agreement or otherwise [3]. Pension sharing orders however only take effect once your Decree Absolute / Final Divorce Order has been granted and the parties must ensure the pension sharing order is served upon the relevant pension company so that the implementation process can begin. Pension schemes take up to four months to implement the sharing order after they receive all necessary information [4]. This timeline starts only when the scheme has everything needed to process the division [4].
Both parties will need to obtain up to date pension valuations as part of financial remedy proceedings or if there are no proceedings, to assist negotiations and the calalation of an appropriate pension share. It is likely and indeed in many cases advisable for the appropriate share to be calculated by a pension expert or Actuary.
It may be that one or other party may wish to retain their pension if at all possible. In those circumstances it may be possible to ‘offset’ a pension claim against other assets, for example the capital in the home. Again a professional report should be obtained to advise as to an appropriate offset figure. The court is however unlikely to impose an order for offsetting if one party wishes to receive a pension share.
Gathering essential documentation
To enable your legal advisor to consider the parties pension assets and provide appropriate advice, the following should be collated:
- Benefit plan descriptions and amendments
- Current and if appropriate historical benefits statements
- Employee data (hire date, birth date, compensation)
Getting accurate pension valuations
Your pension valuation accuracy is vital since these assets are often your most valuable possessions after your property. The valuation process can be complex, especially with defined benefit plans that use various methodologies and formulas [5].
Professional guidance becomes essential for final salary or salary-related pension schemes because the Cash Equivalent Transfer Value (CETV) might not give you a completely accurate valuation. A recent case highlighted this when a pension scheme quoted £194,000, but further investigation showed an underfunded status with a fair value of £353,000 [6].
Exploring Pension Division Methods
Our work with couples has taught us how to guide them through pension division during divorce. Understanding different methods will help you make better decisions. Let’s look at three main ways to divide pensions in a divorce settlement.
Pension sharing orders explained
Pension-sharing orders provide for a transfer of a percentage of one spouse’s pension directly to the other spouse’s pension fund. The receiving spouse can then choose to:
- Join the original pension scheme (if allowed)
- Transfer their share to a new pension arrangement
The transfer takes up to four months after receiving all documents [4]. Both parties get independent control over their retirement funds, which makes this option attractive.
Pension offsetting
Pension offsetting lets you trade pension rights for other assets of similar value. A pension worth £150,000 might mean one spouse keeps their entire pension while the other gets a greater share of the equity in property or other assets [8]. Be aware however that the court will likely apply a discount to any capital sum to be received by way of offsetting on account of utility i.e. the received having the benefit of a cash payment immediately, rather than having to wait until retirement to receive a pension income.
Benefits of offsetting:
- Provides immediate access to other capital assets
- Offers a cleaner break without ongoing pension administration and the associated costs of implementation
- Provides a means of dealing with overseas pension assets [8]
You should think about offsetting carefully. The pension benefits drawn down immediately will be taxed on 75% of the funds [8]. Fair value can be hard to determine since pensions are future benefits rather than immediate assets and there is a real risk that the offset may not represent the true value of the interest in the pension asset. Further once any capital from an offset is spent, there are no further monies available to meet retirement needs.
Navigating Complex Pension Scenarios
The pension division can get complex and needs deep expertise to handle properly. Let me walk you through some of the toughest cases we deal with in pension plan divorce settlements.
Dealing with multiple pension schemes
Our experience shows that 80% of divorcees miss out on properly counting all their pension assets in settlements [7]. This is a big problem since pension pots are usually the biggest asset people own after their home [7].
Here’s what you need to watch out for with multiple schemes:
- Getting the right value for each type of scheme
- Rules that change based on pension categories
- Tax effects on different schemes
- The right time to implement sharing orders
International pension considerations
Jurisdiction plays a vital role in international pensions. English courts can’t make orders about foreign pensions, and foreign courts can’t touch English pensions [9].
Here’s what we tell our clients about international pensions:
- Get valuations from both countries
- Check if orders can be enforced
- Look at other assets within the jurisdiction against which any pension entitlement may be offset.
Expert help from actuaries both here and abroad is essential to get the values right [9]. This matters even more because every country has its own rules about splitting pensions during divorce.
Military and government pensions
Military and government pensions come with their own set of challenges because of special rules and generous benefits. The Armed Forces Pension is usually the biggest asset military couples have [10].
Military spouses face unique challenges in building their own pensions. Moving frequently and dealing with service requirements make it hard for them to build up their own pension [10]. Fair settlements need to account for this.
Military pensions need special and consideration to include:
- Marriage length during service time
- Final rank at service end
- Extra benefits and compensation available
- Best time to share pensions
The Forces Pension Society can help guide you through these complex schemes [10]. Their expertise in military pensions is invaluable.
Post-Settlement Pension Management
Your financial future depends on the proper implementation and management of your court-approved pension plan divorce settlement. Here’s a detailed guide about everything in post-settlement management.
Implementing pension-sharing orders
The successful implementation of pension-sharing orders needs attention to detail and perfect timing. Pension scheme administrators take up to four months to implement the order after receiving all required documentation [4].
These steps will help you achieve smooth implementation:
- Complete and verify all documentation
- Pay required fees to pension administrators
- Specify the destination for transferred funds
- Track the implementation process
- Check final transfer amounts
- Ensure you have obtained your Decree Absolute / Final Divorce Order.
Tax implications and considerations
The tax situation brings good news – divided or transferred pensions in divorce rarely face immediate taxation [11]. But you become responsible for all future tax consequences once the pension becomes yours, including taxes on the pension income when paid any lump sums drawn down. [11].
International pension divisions need special attention. UK pension trustees cannot be bound by US divorce orders, and vice versa, though some accounts like IRAs have exceptions [11]. This makes jurisdiction-specific advice vital for cross-border pension divisions.
Future pension planning strategies
A detailed future planning strategy becomes vital after implementing your settlement. Advice should be obtained at the earliest opportunity as should a final financial order, preferably by agreement if possible, but if not, obtained through the courts.
Your planning should include seeking advice from a suitably qualified financial / pension advisor in relation to the following:
- New beneficiary designations
- Fresh retirement income needs assessment
- Additional pension contribution options
- Tax-efficient investment approaches
Pension assets rank as the second most valuable asset after the family home [12], yet people often overlook them in divorce settlements. Professional financial advice makes a significant difference – only 7% seek it during divorce, while one-third wish they had it later [13].
Public sector schemes like the NHS only allow internal transfers [20]. Your specific pension type and circumstances will determine your available options.
Conclusion
Pension division during divorce needs you to think over several factors – from how to value pensions to ways of dividing them. Proper documentation, expert guidance, and knowing how to use different division methods are the foundations of fair settlements.
Our experience shows that the best pension settlements rely on precise valuations and effective post-settlement management.
Expert guidance can protect your retirement assets better. Robertsons Solicitors can help you understand your pension rights during divorce proceedings and how to manage any pension orders that may be made in respect of pension assets held by you.
Note that pension assets are often your second most valuable possession after property. The decisions you make about pension division today will shape your financial stability tomorrow. The process might look complicated, but understanding your options and working with qualified professionals will lead to a fair settlement that safeguards your retirement.
References
[1] – https://www.royallondon.com/guides-tools/life-events/divorce-separation/divorce-pensions/
[2] – https://www.gulbenkian.co.uk/how-are-pensions-split-in-a-divorce-in-the-uk/
[3] – https://www.pensionbee.com/uk/pensions-explained/pension-rules/how-long-after-divorce-can-you-claim-a-pension
[4] – https://www.moneyhelper.org.uk/en/family-and-care/divorce-and-separation/pension-sharing
[5] – https://etonvs.com/valuation/pension-valuation-divorce/
[6] – https://www.unbiased.co.uk/news/personal-finance/divorce-how-a-specialist-ifa-can-help-you-achieve-a-fair-financial-settlement
[7] – https://www.legalandgeneral.com/retirement/pensions/guides/pensions-and-divorce/
[8] – https://www.fidelity.co.uk/planning-guidance/life-events/divorce-and-finances/pensions/offsetting/
[9] – https://brodies.com/insights/family-law/divorce-and-international-pensions-what-happens-when-your-pensions-are-overseas/
[10] – https://www.gov.uk/government/publications/separation-and-divorce-guide-for-military-personnel-spouses-and-partners/separation-and-divorce-guide-for-military-personnel-spouses-and-partners
[11] – https://www.ey.com/en_uk/insights/tax/how-pensions-are-taxed-during-a-divorce
[12] – https://www.unbiased.co.uk/discover/pensions-retirement/managing-a-pension/pensions-and-divorce-how-to-protect-yourself
[13] – https://www.sjp.co.uk/individuals/news/you-your-divorce-and-your-taxes[14] – https://www.familylawweek.co.uk/42-of-marriages-end-in-divorce/
