Pensions and divorce

What happens to your pension on divorce?

When going through a divorce, your pension may be affected. However, this depends on the financial settlement agreed on before finalising the divorce.

By itself, a divorce doesn’t decide who gets what and when – a divorce is no more or less than the legal end to a marriage.

As part of a financial disclosure, you'll review all the wealth (or assets) built up during the marriage. This is when you'll reveal and combe through all financial assets, including pensions. It’s during this process that you’ll decide what happens to your pension.

What can affect your share of the pension when divorcing?

When making your financial arrangements, you and your ex-spouse are expected to review different factors when deciding how to divide your wealth: 

1. Children – whether you have dependent children and which spouse they will live with.
2. Money – whether you have any other wealth and sources of income to keep you in a reasonable standard of living. They’ll also weigh this against any caring responsibilities (like children or elderly parents).
3. Age and health – the younger and healthier you are, the greater your earning potential. So, if there’s a big age gape, then the younger of you may get less. Well, that’s the general idea. If you’re older and in poorer health, you may have a right to a greater share.
4. Time – if your marriage is less than 12 years old, your financial settlement may not need to include money you put into your pot before getting married.
5. Giving – the courts see the main earner and the main carer as equals. So, if you've earned more money or spent more time raising the kids, your contributions are equal in value.

And, depending on your situation, you may have six options for splitting your pension.

How can pension be split during a divorce?

Normally, you'll come to your own financial agreement about how to divide your financial resources. Make sure to find a trusted professional for advice to guide you through this process. The court will acknowledge this agreement and turn it into a Consent Order, which could include (sometimes by way of a separate addition called an 'annex') any of the following five options for splitting your pensions: 

1. Pension offsetting – this doesn’t split the pensions at all. Rather, you'll balance the pensions against the worth of other assets. For example, you may decide to have a bigger share of the family home instead of a share of your ex-spouse's pension.
2. Pension earmarking – this is also known as ‘pension attachment’. It allows you to split the rights to your pension benefits once they’re available (usually from age 55). So, in your financial settlement, you’ll agree to a percentage of the pension benefits you’ll both receive. The pension provider will then divide payments out of the pension in a certain way. This could be through annuity payments, income drawdown, and/or a tax-free lump sum. But it's worth noting that future payments could be affected if the person who's receiving them remarries.
3. Pension sharing – this means, from the date of the divorce, the court will split each pension into two individual pots. The court will give a 'Pension Sharing Order' (PSO) or a Pension Sharing Annex (part of the Consent Order) that will say how much of the pension you're each owed. So, if the value of the pension is £100,000 a 50% share would give you each £50,000. You'll also have control over when you retire and have access to the benefits when you want them.
   
   But you don't need to split the pension 50/50 – the Order/Annex will set out the exact percentage (in England and Wales, this must be a percentage - it can't be in pounds and pence). If you're getting divorced through the Scottish courts, the Order/Agreement can set out an amount or a percentage.
   
   And if you’re getting a share of your ex-spouse’s pension, you can either become a member of their pension scheme or invest the value you're awarded into another pension. This might not be within your control entirely as it depends on the rules of the pension scheme.
4. Deferred pension sharing – if you're already getting your pension, then this option lets you hold off sharing it until a later date. But you’ll need a court order, and this option doesn't apply in Scotland. 
5. Deferred lump sum – with this option, when you retire, you'll pay your ex-spouse a percentage of your tax-free, pension lump sum. To do this, you'll also need a court order.

State pensions and divorce 

How your state pension is handled, when you divorce, will depend on when you qualify or qualified for it and where you live. Also, the rules are different in Scotland from the rest of the UK. 

Understanding the State Pension on divorce could be tricky. MoneyHelper, a free service provided by the Money and Pensions Service, could be a good starting point. So, explore their information on State Pension and divorce/dissolution to learn more. 

If you’re reaching State Pension age now or since 6 April 2016, you could check out the guidance on GOV.UK on the new State Pension and on the Additional State Pension. 

If you reached State Pension age before 6 April 2016, then find out more on GOV.UK’s basic State Pension.

Pension sharing (after retirement)

The rules around pension sharing are more complicated if you're divorcing when retired.

If your share of your ex-spouse's pension comes from benefits they're already receiving as income, you won't be able to take a further tax-free, lump sum from it when you retire. And that's because the right to a tax-free element is only available once from any pension benefits -- and your ex-spouse will have already taken that opportunity.

If you’re divorcing in retirement, and feeling worried or overwhelmed, chatting with a financial adviser could help you filter fact from friction as you’re reviewing your options.

Divorce and pension rights 

The main goal of any financial order is to make the agreement fair and reasonable for each person. The starting point will be to divide all assets 50/50 and then take into consideration the specifics.

How long after the divorce can I claim a pension?

There's no time limit for either of you to make a claim on your ex-spouse’s finances.

Unless, that is, you have a financial agreement that's legally binding. You can include a 'clean break' provision in the financial consent order to stop any future claims. This way, neither of you will have any financial obligations to each other going forward. Whether that's income and assets in life or estates in death, the court is unlikely accept future claims.

How can I protect my pension in a divorce?

Ultimately, there are two steps to protect your pension:

1. Get an accurate pension valuation – it doesn't matter if you're the main pension saver in the marriage. What does matter is accurately understanding how much all your pensions are worth. And it's not always as straightforward as checking your last pension statement. You may need to think about:
   
        •   tracing multiple pensions from previous jobs
        •   more benefits attached to those pensions, like guaranteed annuity rates
        •   final salary pensions and how their value could impact the financial settlement.
   
   If you have old pensions roaming in the distant past, you'll need to disclose them for the financial settlement. Not doing so may open you up to costly legal actions in the future. 
2. Come to a financial agreement – it could be sitting around the kitchen table together. Or using the help of a mediator or solicitor. Either way, coming to a formal financial agreement could protect your pension from future claims.
   

More costs of a divorce to consider

The financial impact of divorce isn't limited to pensions.

Legal fees

In our recent survey of 1,003 people in the UK, more than half (53%) of divorced adults faced legal fees. The majority, almost one in four (23%), say this cost them between £501 and £1,000. ^{Footnote [1]}  

On average, across all those surveyed, the legal fees cost £3,592.

Setting up a new home

Almost half (46%) paid the costs of setting up a new home, which included:

• furniture 
• white goods
• electronic appliances

And the majority, exactly one in four (20%) say this cost them between £1,001 and £2,000. On average, however, setting up a new home cost those surveyed £4,780. ^{Footnote [1]}  

Insurance

Insurance may not be a cost that's immediately associated with divorce. But, more than one third (36%) of divorcees surveyed paid for home insurance costs while 31% paid for building insurance.

And although the average costs related to home insurance was £752, for those surveyed, the average spent on home building insurance was £653.

Financial security

Over half (52%) of divorced adults in the survey say they have a personal pension plan. ^{Footnote [1]} One in five (20%) say that they'll be significantly worse off in retirement because of their divorce, and 6% of those surveyed say they don't have their own pension plan because they were relying on their spouse to finance their retirement. ^{Footnote [1]}  

If you're worried about your finances through divorce, it's important to check out free and unbiased resources like those provided by MoneyHelper, the Money & Pensions Service or Citizens Advice.

Divorce financial guidance

If you need advice on how to manage your finances through a divorce, Aviva Financial Advice may be able to help.