How Pensions Are Divided In A Divorce Financial Settlement

It can be very disconcerting to discover that you may have to split your private and/or company pension, especially if you have been the main financial earner throughout the marriage. Of all the potentially divisible matrimonial assets that provoke a sense of “that’s not fair” (from both spouses, regardless of the decision), pensions top them all.

To mitigate the risk of a costly, emotionally draining dispute, it helps to understand how pensions are divided in a divorce. It is also wise to remember that pensions are an asset, no different to a car or a house. They often feel more personal because, especially in the case of workplace pensions, they are generated independently. However, the law does not see it that way, it is only interested in creating a fair outcome for both parties.

In July 2019, the Pension Advisory Group (PAG) released a report entitled, A guide to the treatment of pensions on divorce. The paper was endorsed by Sir Andrew McFarlane, President of the Family Division and the contained guidance is considered best practice by divorce lawyers and judges alike in pension division matters.

What are the options for dividing a pension in a divorce?

There are several options for dividing pensions:

Pension sharing

Under a Pension Sharing Order which is made by the Court, one party is given a percentage share (referred to as a pension credit) of their ex-spouse’s pension pot. The pension credit can be transferred to an existing or new pension scheme.

The advantage of a Pension Sharing Order is that it provides both parties with a clean break in terms of the pension element of the divorce financial settlement.

Pension offsetting

Under the pension offsetting option, one party retains their entire pension in exchange for other assets. For example, one spouse might keep their pension, the other the family home. If the pension pot is worth less than the family home, the pension-holder could forgo the equivalent value of the property.

Pension attachment (formally known as pension earmarking)

In this scenario, the Court will make a Pension Attachment Order. This will provide for a portion of one party’s pension to be set aside for their ex-spouse. The ex-spouse will receive their percentage when the pension starts being paid out.

One of the downsides of this option is it does not provide for a clean break. Furthermore, if the pension holder dies before they retire, the receiving spouse may miss out on collecting their percentage of the pension fund.

Deferred pension sharing

Often used as a solution for couples where there is a large age gap, the receiving party will claim a portion of the pension once they reach retirement age.

Deferred lump sum

The receiving party will be paid their share of their ex-spouse’s pension in a lump sum at a later date.

How do I or the Court decide which is the best pension sharing option?

Wherever possible, round-table negotiation and/or mediation will be used to resolve any pension disputes. Your Solicitor and, if the matter cannot be resolved through negotiation or mediation, the Court will consider the factors under section 25 of the Matrimonial Causes Act 1973.

The PAG report encourages divorce Solicitors to undertake a “comprehensive gathering of information regarding the parties’ pension assets” and “ensure that aspects of pension entitlements which may not be immediately obvious are identified, for example, death benefits and guaranteed annuities and various other potentially complicating features”.

The guidance also states that Solicitors should evaluate at an early stage whether or not a Pension on Divorce Expert (PODE) should be appointed. PODEs can be independent financial advisors, actuaries, or accountants. They act as advisors in complex pension-sharing cases, usually involving people of high-net-worth, to ensure a fair outcome is achieved.

Final words

The best way to ensure a fair outcome for pension division in a divorce is to instruct an experienced family law Solicitor. They will ensure a PODE is instructed if necessary and do everything possible to help you resolve disputes outside of Court. Furthermore, once an agreement is reached, they will draft a Consent Order to make the deal legally binding.

For a free consultation regarding pension sharing in a divorce, please call us on 0208 300 6666.

A Guide to the Treatment of Pensions on Divorce (nuffieldfoundation.org)

How Finances Are Divided In A Divorce (klrsolicitors.co.uk)