Most people realise that marital assets such as cash savings or property are split between partners in the event of a divorce or dissolution of a civil partnership. What tends to be forgotten is pension assets.
This guide covers:
- If your spouse is entitled to a share of your pension if you get divorced
- How pension assets might be split in the event of separation.
Spouses and civil partners are indeed sometimes entitled to a share of pension assets, but just how they’re split is complex and dependent on the circumstances of each individual case.
As well as seeking legal advice from a solicitor who specialises in divorce (who in turn may seek guidance from a qualified pension adviser or actuary), each party should also get financial advice — even if you believe you have a clear understanding of the issues or think your affairs are simple.
You’ll Need a Court Order to Divide a Pension
Pension funds can only be divided by a court order as they were set up with only one beneficiary in mind: the person saving for a pension.
The courts may be more likely to agree to a pension split if there is a significant imbalance between the pension savings of the two parties. This could be because one of the couple has been the breadwinner, while the other has worked part-time or not at all (perhaps because they’ve taken care of the family and home).
How much each party could get is dependent on individual circumstances, and if both parties already have similar pension provisions in their own names then the courts may rule that pension assets don’t need to be split at all.
Are Pensions Split in a Divorce?
Much depends on the circumstances of the individual case and what the two parties agree to, but pensions are often considered matrimonial assets and potentially split in a divorce.
Sharing a pension on divorce is a complex area, especially if the divorce is acrimonious.
Each party should take professional advice from a divorce solicitor on top of financial advice, especially when there’s a pension involved.
In some cases, pensions may go untouched during a divorce in favour of one party receiving a greater share of other matrimonial assets, such as the family home, in the final settlement. Whether or not your pension is split during a divorce will depend on your circumstances and the agreement reached between the two parties.
Due to the devolution of certain areas of law in the UK, the rules are slightly different depending on where the spouses live.
In England and Wales and Northern Ireland, all assets built up by each individual — including pension assets — up to the date of the separation are taken into account when calculating total matrimonial assets. In Scotland, however, only assets built up during the marriage are used.
Divorce and the State Pension
Some elements of the State Pension may also be split in a divorce. Although the basic State Pension can’t be divided in a divorce, any additional State Pension benefits, such as SERPS or the second State Pension (S2P) can be split on divorce or dissolution of a civil partnership through a pension sharing order.
An ex-spouse or civil partner can also use their former partner’s National Insurance contributions to increase their State Pension for the years they were married. Both of these rights are lost when they remarry or enter a new civil partnership.
The New State Pension (brought in for men born on or after 6 April, 1951 and women born on or after 6 April, 1953) cannot be shared between former spouses and civil partners. This is because it is paid at a flat rate to all based on qualifying years of National Insurance contributions.
Divorce and Final Salary Pensions
Defined benefit schemes can complicate the sharing of pensions in a divorce and will require additional analysis and expertise. This is because the member’s pension entitlement is a promise from their employer and is not reliant on investment returns or annuity rates.
It may also be linked to their final salary, which is hard to determine at the time of the divorce, especially if the couple is young.
This specialised analysis work adds an additional expense to the overall cost, especially if the member is enrolled in more than one defined benefit scheme. The member must also consider the financial ramifications if they look to transfer out of the defined benefit scheme to split the pension entitlement with their spouse. Doing so might be giving up a guaranteed retirement income.
Some final salary schemes, especially public sector schemes, may allow the non-pension holder to become a pension sharing member in the event of a divorce. Speak to your scheme or ask a pensions expert about this option.
Any shortcuts or failing to seek professional financial advice with these types of schemes will almost certainly be costly in the long term. Importantly, you should apply to the relevant providers and seek some pension advice from a financial adviser as soon as possible if a final salary pension split is on the table, because it can be a long and complex process.
Pensions That Can Be Shared in Divorce
The following arrangements can generally be shared:
- All money purchase / defined contribution pension arrangements, including personal pensions, stakeholder plans, executive pensions, occupational money purchase schemes, small self-administered schemes (SSAS), retirement annuity contracts (section 226), buy-out plans (section 32) and AVCs
- Defined benefits schemes (including career average and hybrid schemes)
- State earning related pension scheme (SERPS) and state second pension (S2P)
- Compensation schemes
- Pension Protection Fund and Financial Assistance Scheme
- Deferred benefits and benefits in payment
- Pensions in payment
- Scheme pensions, annuities and drawdown plans.
Pensions That Can’t Be Shared in Divorce
The following types of pension can’t typically be shared in a divorce:
- Basic State Pension / New State Pension
- Graduated retirement benefit (second-tier state pension)
- Widows pension benefits from a previous marriage
- Pensions already subject to an earmarking order.
Under a pension sharing order, all pension benefits are calculated as a ‘capital value’. For money purchase arrangements this is simply the transfer value and for defined benefits schemes the cash equivalent transfer value (CETV) is used.