What Happens to Pensions When You Divorce?

When considering how to distribute the assets of a separating couple, the court has recourse to all the available assets and will ordinarily use the asset’s current value, as opposed to its value at any other time, such as when it was brought to the marriage. This means that assets acquired from a previous marriage or civil partnership will potentially form part of a financial settlement for any future divorce.

Our team of leading divorce lawyers in Milton Keynes can advise and guide you through the entire process of the divorce settlement. This article provides a quick overview of some of things to think about with pensions and divorce.

Whilst the parties and court will always need to give consideration to the assets available, there is considerable discretion as to how those assets might be divided between the parties. The court’s “thought process” is documented in s.25 Matrimonial Causes Act 1973. Broadly, this states that the court will give primary consideration to any children of the family under the age of 18, and thereafter, the total available assets are shared equally before the court will then use a series of equally weighted criteria to decide if a departure from equality is needed to provide a fair and reasonable settlement.

There are three general ways in which a private pension might be divided upon divorce:

• Pension attachment order

A pension attachment order works by allowing the partner without the pension to receive income or lump sum payments from it in the future. The pension benefits are sometimes said to be ‘earmarked’ for their benefit.

These are rarely favoured by the court as the scheme terms may require the receiving party to wait until their ex-spouse retires, choses to take their benefits or dies to receive the earmarked benefits. The receiving party will have no control over the investment decisions taken in relation to the scheme either. Additionally, if the paying party retires early or stops contributing to the pension scheme, the receiving party may receive less than expected.

As a result of these disadvantages, pension attachment orders have fallen out of favour with the court and are rarely utilised.

• Offsetting

Under offsetting, the value of any pension scheme or share in it, is offset against the other assets available to the parties. In crude terms, this means a party would retain pension assets providing their spouse’s share was “bought off” with other assets in the case. Of course, offsetting isn’t always possible if there aren’t enough non-pension assets to use.

• Pension sharing

Pension sharing works by splitting the pension scheme benefits at the time of the divorce. The party without the pension receives a share of the pension benefits (known as a “pension credit”) which are transferred into their name.

The party receiving the pension credit may be able to choose whether to keep their pension credit in the existing scheme or whether to transfer it to a new pension.

Crucially, pension sharing achieves a ‘clean break’. The future death or remarriage of either one of the parties will have no effect on the pension sharing order.

Perhaps two important points to note – firstly, you can’t have a pension sharing order applied against the state pension. Secondly, both parties are responsible for their respective tax positions on the pension credit income received after implementation of the sharing order.

As above, pensions are always considered as part of a settlement, but not always split. Off-setting is by far and away the most common approach to dealing with pensions on divorce, although not always the most advantageous for either party.

Pensions are tricky to deal with and can be daunting to tackle, but it is vital that early legal advice is obtained to understand what options are available and most beneficial in your particular circumstances.

Ready to take the next step? As leading divorce lawyers in Milton Keynes, our team of family law specialists can advise and guide you from the moment we start working with you. We also have offices in in Bicester, Watford and London. Talk to us in confidence and find out where you stand. Get in touch – we’re here to help.

This article is intended for the use of our clients and other interested parties. The information contained in it reflects the author’s view and is believed to be correct at the date of publication. However, it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional legal advice.