Pensions are often a couple’s most significant asset, after their property, and must not be overlooked in a divorce settlement. In this article, George Square Financial Management outlines the three key methods of how your pension can be split up in the event of a divorce and explains the importance of forward planning.
1. Pension sharing
Pension sharing is a formal agreement to divide up pension assets at the time of divorce. It is a good option for many people because it allows you to make a clean break from your ex-partner.
Before pension sharing was introduced in December 2000, a spouse who had not worked during their marriage might be left with no pension entitlement whatsoever after a divorce. But divorce pension sharing now means that pensions are included in the total value of marital assets.
To agree on a division of the pension pot, you need to apply to the courts for a pension sharing order. The courts determine exactly what percentage will be shared, and the receiving party can become a member of the pension scheme or transfer the value to a new pension; it will depend on the pension scheme rules as to which method they allow. Any money received from the pension pot of your former partner will be legally treated as your own.
2. Pension offsetting
Under this method, assets of the same or similar value are allocated to your former partner, and all or more of your pension remains with you (or vice versa).
The transfer value of the pension is included with the value of all other matrimonial assets, and pensions can then be offset against other assets. For instance, if one person has a very large pension pot, the other may receive the marital home (assuming it has a similar value).
Pension offsetting can be an attractive option to the receiving party because the money or equity they get to keep, for instance from the house, savings or investments, is of more immediate use to them than a pension share. As with pension sharing, it also allows for a clean break from your ex-partner.
3. Pension attachment
There are certain, less common, situations where a pension attachment order is made in preference to a pension sharing order or pension offsetting.
Pension attachment, sometimes called pension earmarking, is like a maintenance payment directly from one person’s pension pot to their former spouse or civil partner. As such, it does not allow for a clean break financial settlement.
The Court instructs your scheme administrator or pension provider to make these payments to your ex-spouse or partner, or vice versa, on retirement. In England, Wales or Northern Ireland, these payments can be made from:
- The member’s pension income
- and/ or, the pension commencement lump sum (PCLS)
Pension attachment orders do carry a level of risk in comparison to the other options. For instance, if the person with a pension fund were to die before retirement, then the percentage of the monthly payments would be lost to the other party. There are ways to mitigate this risk through life assurance and other possible options, but it can be a complex matter.
Obtaining the right guidance and support is vital when dealing with pensions in the event of a divorce. Pensions vary in complexity but can be confusing at the best of times. The details need to be addressed carefully. Valuing a pension can be very complicated – particularly if the pension is in a defined contribution scheme, where the total value fluctuates depending on its investments.
At George Square Financial Management, we understand that life is unpredictable – we never know what it might throw at us. But with professional guidance and a bit of forward planning, you can build a protection plan which meets your current needs and adapts as circumstances change.