When you are at the heart of a divorce there is so much to worry about during what will be the most upsetting and stressful time of your life. However, one can never forget pensions in a divorce. Some pension pots could be even more valuable than savings or even the family home, particularly as they will provide a guaranteed source of income for either or both parties later in life.
Your immediate thoughts will naturally revolve around ensuring you have a home, an income and can continue to provide the highest level of care and security for your children.
However, you also need to take a broader view of all the marital assets involved in your separation. Missing something as major as a pension could leave you in a significantly weaker long term financial position that could have been avoided with the right guidance.
How do you divide pensions in a divorce?
In England and Wales, the total value of the pensions both parties have accumulated will be considered during the financial settlement process. It is important to remember this figure will be the total in both pensions, not just the amount accumulated during the marriage or civil partnership.
There is no guarantee as to how the percentage split will look. The Court’s main objective is always
to reach the fairest possible outcome. This means it is likely discussions will start at or close to
50/50. However, this could easily be adjusted if it is felt these proportions are not in both parties’ best interests.
There is also a possibility pensions could be ignored altogether if both parties have their own and they are fairly equal and/or suitable to providing a level of future income that is deemed acceptable for the respective parties.
In terms of how the pension is split, traditionally there have been three main ways to divide a pension during a divorce:
Pension assets are offset against the other assets of the divorcing parties as part of the final financial settlement.
2. Pension sharing orders
Pension assets are formally divided so there is a clean financial break for both parties.
3. Pension attachment orders (‘earmarking’)
This is where the pension provider of the pension holder pays their former spouse an agreed amount once the pension payments begin. There is a real risk associated with this option if the pension owner dies before retirement or remarries and updates the spousal details on the policy.
Will ‘no-fault’ divorce have its own impact on dividing pensions?
‘No-fault’ divorce came into force on the 6th of April 2022. It was designed to make divorce quicker and less arduous for those involved but there is a real concern that it could potentially pose a bigger risk to the fair division of pension assets.
According to a report published by former government minister Steve Webb and barrister Rhys Taylor “there is much to commend the new divorce law on” but the faster pace at which divorces can now move could cause financial settlements to be rushed. This could prevent a fair division. As the attention is now on moving the divorce more quickly, the more complicated elements – for example pensions – may not get the attention they deserve.
Similarly, with added emphasis on making divorces more amicable, the report suggests applicants will be less likely to raise and fight for a fairer division of the more contentious aspects of their financial settlement. Again, pensions would fall into that category.
Mr Taylor suggests that perhaps the Ministry of Justice could take action to offer those at risk more protection.
This could include monitoring the number of divorces involving financial settlements and how many financial orders involve pensions by collecting the relevant information from the new ‘Form D81’. Or, it could involve introducing formal prompts to remind both parties to give pensions the attention they’re due during the divorce process.
What can you do to make sure pensions are properly considered in your divorce?
To ensure any existing pensions are treated fairly during divorce, you may like to consider the following tips:
1. Remember your Will
While a Will is invalidated when you get married (and therefore should always be updated as a matter of course), when you get divorced your Will will be respected unless it has been updated during your separation.
2. Understand the options
Pensions are a complex area but there are several different ways to share the pot during divorce. Talk through these options with your lawyer and make sure you understand offsetting, sharing orders and attachment orders so you can make the best decision.
3. Retain control
Using trust structures like spousal bypass trusts could allow you to retain greater control of your pension assets during divorce.
4. Understand your annuities’ position
Unless you update the death benefits for the annuities payments outlined by your pension policy with new spouse details, the original beneficiary – most likely your former partner – will still receive your annuity benefits following your passing.
We would always suggest you seek professional advice from the relevant experts when dealing with or getting to grips with pension issues. However, if you would like to discuss how our family law experts could help you achieve the best possible settlement during a divorce, please contact us today.