If you’re getting divorced, working out how to divvy up your pension savings may be the last thing you want to think about, especially if retirement is still many years away. But while making decisions about your retirement income may seem less important than deciding who gets the family home, a fair division of pension savings should be a top priority in any divorce settlement. This guide explains why, and how to make decisions surrounding pensions and divorce.
How does a divorce affect a pension?
Your pension is a financial asset that – like any other asset – will need to be taken into consideration in a divorce, or the dissolution of a civil partnership. This applies whether or not you’re already drawing your pension.
If both members of the couple have a pension, then pension schemes owned by each of them need to be taken into account.
The rules on how much of a pension is taken into account are slightly different in Scotland versus England, Northern Ireland and Wales.
- In England, Northern Ireland and Wales, the total value of all pensions is taken into account, regardless of when they were built up.
- In Scotland, only the value of pensions built up during the marriage or civil partnership are taken into account. So, any pension that was built up before you married or formed a civil partnership won’t usually count.
Does the type of pension affect what happens after a divorce?
Yes. The rules for the state pension are different to the rules for workplace pensions or personal pensions, such as SIPPs.
How are personal and workplace pensions divided after divorce?
There are 3 main ways in which a pension can be handled in a divorce or the dissolution of a civil partnership.
The pension isn’t divided. Instead, it’s offset against other assets. So, one person might keep their pension, while the other retains all other savings and investments, for example.
- Offers a clean break
- Can be the simplest option
- No costs incurred in pension splitting fees
- It may be hard to assess value of assets in order to offset fairly
- One person may be left with limited pension provision for retirement
The ownership of a percentage share of one person’s pension is transferred to the other person. Depending on the pension scheme rules, this might be an entirely separate scheme or the same scheme the pension has come from. A pension provider has up to 4 months to enforce a pension sharing order from receiving necessary information.
- Offers a clean break
- Both people have full control of their share of the pension
- Ensures both parties have some pension provision in retirement
- Pension providers usually charge a fee to split pensions
- Some pension types can be complicated to split
- If the current pension holder is already drawing a pension, this can make splitting more complex and fees more expensive
Pension attachment orders
Under these orders (known as “pension earmarking” orders in Scotland), when your pension benefits start to be paid, some of the benefits are redirected to your former partner. In England, Northern Ireland and Wales, this can apply to either pension income or any tax-free lump sum, or both. In Scotland it only applies to the lump sum, and can’t be used to redirect income.
- Gives both members of a former couple a share of pension benefits
- Ensures both parties have some pension provision in retirement
- Order can also apply to lump-sum death benefits, if scheme member dies before they start drawing their pension
- No clean break, as members of the former couple will have an ongoing financial relationship
- The person receiving redirected benefits won’t start getting them until the scheme owner takes their pension
- Payments will stop on the scheme member’s death – or may not start at all if they die before retiring (other than lump sum death benefits)
- Income for both parties is taxed as though it is being paid to the scheme member, which may be to the recipient’s disadvantage if their former partner is in a higher income tax band than they are
Dividing up defined benefit workplace pensions can be more complex than it is with defined contribution pensions. It may be possible to arrange for the scheme to pay a share of income to the ex-spouse, as under a pension attachment order. Another alternative is to transfer the value of the scheme into a pension pot that can be divided according to the financial settlement. However, you should seek regulated advice before doing this, as you may lose valuable scheme benefits by doing so.
How is the state pension divided after a divorce?
This depends on which type of state pension you get. You can read more about the different types and entitlements in our full state pension guide.
New state pension rules
The “new” state pension is paid to those reaching state pension age from 6 April 2016. The new state pension cannot be shared following a divorce.
However, if you receive a “protected payment”, the court might order this to be shared. This is an extra amount typically paid if your entitlement under old state pension rules was higher than the maximum new state pension.
Previous state pension rules
If you reached state pension age before 6 April 2016, you’ll receive your state pension under the old rules. There are 2 parts to this: the basic state pension and the additional state pension.
An individual’s basic state pension entitlement can’t be shared. Some people will only have built up this part. However, if you’ve also built up additional state pension, the court can order this to be shared following a divorce.
Divorced couples can also use their former partner’s National Insurance contributions to increase their own basic state pension, without affecting the other person’s entitlement.
Any rights to a former partner’s state pension are lost if you remarry or form a civil partnership before you reach state pension age.
Does it matter who has saved the most into a pension?
Typically not. Or, at least, it certainly won’t be the most important factor under consideration when deciding who gets what in a divorce. This decision can be particularly complex if you have financially dependent children, or one member of a couple is financially dependent on the other.
Bear in mind that a divorce settlement takes into account all of a couple’s assets, not just pensions. Divorce law can be complex, but agreeing a fair divorce settlement is primarily about the future needs of each person, rather than past contributions.
Am I entitled to a share of my long-term partner’s pension if we weren’t married or in a civil partnership?
Typically not. Under usual circumstances, neither member of a former couple in this situation is automatically entitled to a share of the other’s pension. Even if you’ve been living together in what’s often known as a “common-law” marriage for years, you don’t usually have the same legal protection as married couples or civil partners. There are some exceptions in Scotland.
If you’re getting divorced, or contemplating the possibility, make sure any financial settlement doesn’t overlook pension savings. It’s arguably one of the most important assets to take into account in a divorce. And whether you have substantial pension savings, or none at all, it’s worth taking time to establish the best pension-sharing approach for you and making sure this is clearly outlined in a legally binding agreement.
Frequently asked questions
More guides on Finder
Pension statistics: What is the average pension pot in the UK?
We look at the average pension pot in the UK and other pension statistics.
Taking your entire pension pot
We outline the pros and cons of withdrawing your whole pension as a cash lump sum, and why this could result in a high tax bill.
Vanguard pension review
Should you trust Vanguard with your retirement savings? Discover the pros and cons of Vanguard’s pension.
What is the triple lock on pensions?
We delve into what the triple lock on the state pension means, why it may be removed, and the possible consequences for pension recipients.
Finding, transferring and combining your pensions
Find out how to find all your pensions and the rules and risks if you want to transfer or combine pensions.
Best pension fund
Looking for the best pension fund to invest your pension in? We’ve found some of the best ones by their compound annual growth rate.
Wealthify pension review
As well as its ISA and general investment options, you can also invest in a Wealthify pension. Find out the features of Wealthify’s SIPP.
Best private pension in the UK
We’ve compared some of the best private pensions to find the best for fees, charges, mobile access and consolidating old pensions.
How much money do I need to retire?
If you want a secure retirement, you should start saving early. Here are the factors to consider to calculate how much you should put aside each month.
Pension contribution increases: What does it mean for me?
From 6 April 2019, employee and employer pension contributions rise. Find out how this impacts you, and what your options are in this simple guide.