Divorce is undoubtedly a challenging process for everyone involved, both emotionally and financially. While the division of conventional assets like the family home, savings accounts, or high-value possessions often takes centre stage, pensions in divorce proceedings for UK residents are frequently overlooked.
Unfortunately, ignoring pensions during divorce can leave one partner at a significant financial disadvantage, often under the guise of “keeping things simple.” However, simplicity should never come at the cost of fairness. Pensions and divorce in the UK should go hand in hand, as they are often among the largest and most valuable marital assets — assets that can have long-term implications for financial security if not addressed.
Note: Pension and divorce considerations in Scotland differ from the rest of the UK. For more information about ensuring you receive a fair pension settlement in Scotland, contact a member of the team today.
The Value of Your Pension in Divorce Settlement
Your pension isn’t just a savings account; it represents years of hard work and keen financial planning for a secure retirement. Overlooking pensions in UK divorce proceedings doesn’t just risk unfairness — it can jeopardise the financial stability of one party in their later years.
In some cases, pensions are even more valuable than the family home or other high-ticket items. Importantly, pensions also provide an ongoing income stream after retirement, unlike most other forms of assets, making them a vital consideration in any settlement.
This is particularly important for any couples where one partner has been the primary earner, while the other either didn’t work at all or worked part-time in order to instead take on caregiving responsibilities for the family. Pension savings often become highly unequal in marriages. Failing to properly address pensions during divorce proceedings may leave the lower-earning spouse financially vulnerable later in life.
Sometimes, one party might suggest ignoring pensions in order to “simplify” the process or expedite the settlement. While this might seem reasonable in the moment, it can lead to serious regret and financial disparity down the line. Ignoring pensions might leave one spouse with a comfortable retirement while the other struggles to make ends meet.
Do I Have to Share my Pension When I Divorce?
The question of whether you have to share your pension is common among divorcing couples. Since pensions and divorce in the UK became linked closer through the Welfare Reform and Pensions Act 1999, pensions are required to be included in financial disclosure. Otherwise, it would be classified as a ‘concealed asset’ and the settlement would likely be reopened upon discovery.
However, “do I have to share my pension when I divorce?” is not a straightforward question. While pension sharing isn’t compulsory; it’s an option for both parties to pursue based on what’s deemed to be fair.
How Divorce Pension Sharing Works
Pensions in divorce in the UK are widely considered to be ‘fair game’. Courts in the UK generally treat pensions as assets to be divided during divorce. This process involves calculating the total value of pensions accrued during the marriage and deciding how to share them fairly. The most common methods include pension sharing orders, pension offsetting, and pension earmarking:
Pension Sharing Orders
This method involves the splitting up of the pension at the time of divorce, with a percentage transferred to the other party. The receiving party can either transfer the funds into their own pension scheme, or create an all-new one.
Pension sharing orders offer a clean break for all involved, ensuring that both parties will have control over their retirement funds, allowing them to prepare accordingly.
Pension Offsetting
In this approach, the value of the pension will be offset against other marital assets. For example, while one party may retain their entire pension, the other may receive a larger share of the family home or collective savings.
This method can be beneficial if one party favours immediate financial assets over future pension benefits.
Pension Earmarking
Sometimes referred to as pension attachment orders, earmarking involves redirecting a certain portion of the pension benefits to the other party upon retirement.
While this ensures the recipient benefits from the pension, it does lack flexibility and leaves them at the whim of the pension-holder’s choices, such as when they choose to retire.
Dispelling Misconceptions about Pensions & Divorce in the UK
There are several misconceptions surrounding pensions in divorce settlements for UK couples that can lead to unfair outcomes, including:
“My Pension Is Safe Because It’s in My Name”
Many people believe that their pension is untouchable during separations because it is held in their own name. However, in the UK, whose name the asset is in does not come into consideration when determining which assets are subject to division — they all are, including pensions.
“Pensions Are Too Complicated to Include”
Dividing pensions during a divorce in the UK can be challenging due to the complexities of different schemes and rules. However, experienced financial and legal experts help accurately value and fairly divide these assets.
Avoiding pensions simply because they seem complicated could leave one party with a significantly lower settlement than they rightfully deserve.
“The Divorce is Amicable, So We Don’t Need to Address Pensions”
Even in the most amicable divorces, pensions should never be overlooked. Financial position can always fluctuate. Therefore, failing to factor in pensions can often lead to major regret down the line, and ultimately financial hardship if a situation is severe enough.
How to Address Pensions During Divorce
Addressing pensions during a divorce is one of the most critical steps to ensure an even and fair future for both parties. Given the complexity of pensions and their significant impact on long-term stability, careful planning and professional guidance are essential. Below, we outline the key steps to effectively manage pensions in divorce proceedings for UK residents:
Obtain a Pension Valuation
A key first step in addressing pensions in a divorce in the UK is to obtain a valuation for all pensions held by both parties.
The valuation should reflect the ‘cash equivalent transfer value (CETV) of the money; this figure is used to calculate the pension’s actual worth.
Work with Professionals
Navigating pensions and divorce in the UK can be complex, so working with legal and financial experts is crucial. A family solicitor experienced in pensions and divorce can handle the legal intricacies, while financial advisers can assist with valuations and asset division strategies.
Consider Your Long-Term Needs
When dividing pensions, it’s important to think primarily about long-term financial security rather than focusing solely on immediate gains. Ensure that the division allows both parties to maintain a reasonable standard of living in retirement.
What Happens If Pensions Are Ignored?
Overlooking pensions in divorce settlements can lead to severe financial consequences down the road. One party may face retirement poverty while the other enjoys a much more secure future. Additionally, revisiting settlements after a divorce has been finalised can be highly stressful, complex, and costly.
By addressing pensions properly during the process, divorcing couples can secure the fairest settlements possible. This helps in avoiding any future regret and protecting their financial wellbeing.
Secure Your Financial Future Today
Divorce is a difficult process, and it’s easy for things to be overlooked in the heat of the moment. However, pensions in divorce for UK couples are too important to ignore. By ensuring that pensions are addressed fairly, you can protect your financial future and avoid costly mistakes.
If you’re navigating a divorce and need guidance on how to handle pensions, our experienced team is here to help. Contact us today for expert advice tailored to your situation.
If you’re navigating the process of pensions and divorce in the UK, our people are here to help. For further assistance, feel free to reach out to David Connor at [david.connor@whnsolicitors.co.uk] or call [01706 232039], get in touch with Stephen Pinnington at [stephen.pinnington@whnsolicitors.co.uk] or [0161 761 8079].
