How are pensions split during a divorce?
If you’re getting divorced, don’t overlook your pension. Make sure it’s part of your financial settlement, and decide how it will be split, if at all. Read on to find out more about your pension and divorce, including where you can go for advice.
Going through a divorce or civil partnership dissolution can be extremely stressful – emotionally, practically, and economically. To make sure you’re financially secure for the future, including during retirement, make sure you consider how all your assets will be divided.
If you and your ex agree on how to split your assets, it’s wise to capture your agreement in writing and ask a solicitor to check it, to make sure it’s fair and doesn’t contain anything that could cause problems later on. Make sure any pensions you and your ex-partner have are part of the agreement – after the house, they may be the next biggest asset.
If you can’t agree with your ex on how to split your assets, you’ll first need to try mediation. If that isn’t helpful, you can apply for a financial order, which means that how you split your assets, including any pensions, will be decided by a court of law.
Ways to split your pension
There are three main ways in which your pension might be split if you get divorced. These are earmarking (or ‘attachment’), sharing, and offsetting.
Pension earmarking (or ‘pension attachment’)
Pension earmarking is where you split the rights to a pension pot, and both parties get a percentage of the money when it becomes accessible. Bear in mind that with this method, either you or your ex-partner will remain the ‘owner’ of the pot, responsible for when to start claiming, and, depending on the type of pension, what it’s invested in.
Pension sharing is just as it sounds – the pension pot is ‘shared’ between the ex-partners at an agreed percentage. The money goes into two separate pots, and each person gets to decide when to take their share and what to do with it, independently of the other.
Pension offsetting is when one party’s pension is offset against another asset in the marriage – for example, person A gets the pension (or a certain amount of its value), and person B gets the house (or a certain amount of its value) to make up for the loss of pension benefits which person A keeps. This can work well if there are assets of similar value to the pension pot in question. It gets trickier if the pot is worth much more or much less than any other tradable assets.
What about final salary pensions?
Final salary pension schemes, also known as ‘defined benefit pensions’, work differently to the more common ‘defined contribution pensions’, where payments are made to the recipient from an already-invested pot of money. Instead, defined benefit pensions pay the recipient a guaranteed income for the rest of their life. If you work for the government or in the public sector, it’s very likely you’ll have this type of pension.
In order to share a final salary pension between ex-partners, the defined benefit pension could either be transferred into a defined contribution pension or, if it cannot be transferred out, membership to the scheme must be offered instead. If this is a step you’re interested in taking, it’s a sensible idea to speak to a financial adviser – and in fact, if your defined benefit pension transfer value exceeds £30,000, by law you’ll have to seek financial advice. Keep in mind that once a defined benefit pension has been transferred out, it can’t be transferred back in.
Are pensions always split during a divorce?
You don’t have to split up your pensions if you and your ex-partner both agree this is something you don’t want to do. Instead, you’ll need to get an ‘Individual Agreement’, a legal document officially stating your decision, to avoid disagreements if one or both parties changes their mind later down the line. If you do choose to go this route, it’s suggested that you take legal and financial advice beforehand.
Will divorcing affect my state pension?
Whether divorcing will affect your state pension depends on the kind you have.
Basic state pension
The basic state pension cannot be split if you divorce. (It’s also worth knowing that if you hold this kind of pension, you can use your ex-partner’s National Insurance contributions to boost your own pot, at no cost to them.)
Additional state pension
The additional state pension is money paid to you on top of your state pension, based on earnings as well as National Insurance contributions. If your additional state pension entitlement is more than your new state pension entitlement, the amount it exceeds it by is called a ‘protected payment’, and this may be split if you divorce.
You can find out if you have a protected payment, and its value, by applying for a state pension statement.
New state pension
The new state pension was introduced in April 2016. It’s based on National Insurance contributions, and cannot be split.
If you’re divorcing or ending your civil partnership and want to know how much your state pension is worth, you’ll need to fill in the BR20 form.
Where can I go for more advice?
If you’re looking for more resources and support about splitting a pension during a divorce, or to learn about your rights, you might want to try The Pensions Advisory Service, Citizens Advice or Pension Wise.
WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than originally paid in.
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Hannah has been writing about money since 2013. Formerly a copywriter for Virgin Money, covering credit cards, mortgages, pensions, and more, she now writes on personal finance for NerdWallet UK. Read more