What might happen to your pensions on divorce?

The survey in this article says that one in six divorced people did not realise their pension could be affected by splitting up, more than a third made no claim on their former partner’s pension and 8% of divorcees do not have their own pension savings. 

So, what happens to pensions when people get divorced? 

When people get divorced, legally they have financial claims against each other. This includes claims against each other’s pensions. So, if these claims are exercised, what can happen to the pensions? I’ll give you a scenario. The wife has a pension of £400,000 and the husband has a pension of £150,000. They are both around 55 years old and have been married for 30 years. 

In this scenario, the most common outcome would be for some of the wife’s pension to be shared wtih the husband. This involves a sum from the wife’s pension pot being transferred into a pension pot for the husband, so going forward their pensions will be completely separate.  This is called pension sharing and can only take place after an order has been made by the Court (this can be done by agreement and doesn’t have to involve physically going to Court). 

Depending on the type of pension, pensions are often shared based on the income that they will produce for people during retirement rather than on the pot value. So in our scenario above, it’s not necessarily the case that £125,000 of the wife’s pension should be shared with the husband. This is because two different pots of pension worth the same amount might not give people the same level of income during retirement, and it’s the income that a pension is going to give to you in retirement that’s most important. 

A pension report is needed from a pensions expert in a lot of cases to report on how much pension needs to be shared to achieve equal income. Unless pensions are very small, it is usually worth getting a report as it could make a big difference to your future pension provision. 

It is not just pension sharing that is available on divorce.  Instead, sometimes people decide to offset pensions against other assets. In our scenario above this might mean that the wife keeps her pension of £400,000 and the husband keeps more of the capital assets, for example the equity in a house or savings. This obviously depends on what other assets or cash are available. An important point to note here is that £1 or pension is not usually worth £1 of cash.  Therefore, unless the pensions are very small, if offsetting is being considered, you would usually need to obtain a pension report to advise on offsetting. 

A third option would be to have a pension attachment order.  In our scenario above this would mean that when the wife and husband reach retirement age, a percentage of the wife’s monthly pension income would be paid to the husband. However, this arrangement is very rare because there is a fundamental problem; if the wife were to die, then the husband’s income would stop. It is therefore usually better to have pension sharing rather than pension attachment.

Finally, it’s not necessarily a case that all pensions should be shared. Factors such as the length of the marriage, other assets, how much pension was accrued before the marriage could potentially be taken into account in deciding how much pension should be shared. This will depend on the individual circumstances of the case. There might also be other factos to take into account too, such as the lifetime allowance, pensions held abroad and whether there is a way to share pensions that gives a couple both more income. 

If you need any help with your divorce and what should happen to your pensions please give me a call on 01865 521041. 

One in six divorced people said they did not realise their pension could be affected by splitting up, a survey has found.

More than a third said they made no claim on their former partner’s pension, according to the survey of more than 1,000 divorced people.

The research, carried out for Aviva, found 8% of divorcees do not have their own pension savings – and had been relying on their partner to finance their retirement.

As a result of divorce, 19% say they will be, or are, significantly worse off in retirement.