How are pensions split in a divorce?

In many divorces pensions are one of the most valuable assets, often second only to the former matrimonial home. It is therefore essential that pensions are properly taken into account in the divorce settlement.

Unfortunately, many people are unaware of the importance of pensions and how they are split on divorce, with the result that all too often they do not receive their true entitlement in the divorce settlement, which can result in them suffering economic hardship in old age.

In this post we will give a basic outline of how pensions are split in a divorce, but obviously there is no substitute for expert legal advice.

There are in fact three ways in which pensions can be dealt with on a divorce, although only one of these actually involves splitting of pensions.

Offsetting arrangements

The first way that pensions can be split in divorce is by way of an ‘offsetting arrangement”, whereby the pension-holding party keeps the pension, but the other party is compensated by having a greater share of the other assets.

Offsetting can be attractive where, for example, the party without the pension wishes to retain other assets, such as the former matrimonial home.

However, offsetting is not without its disadvantages.

For one thing it is impossible to equate the value of a pension with the value of a physical asset. They are quite different things.

And secondly of course the party without the pension can find themselves with insufficient pension provision, and insufficient time to accumulate sufficient provision.

Pension attachment

This is where the court orders that part of the pension benefits be paid to the other party, when the pension comes into payment.

Pension attachment also has its disadvantages, for example the party in whose favour the order was made has no control over when the other party takes the pension.

Because of the disadvantages pension attachment orders are quite rare.

Pension sharing

This is where the court will share the pension(s) between the parties.

Pension sharing involves the splitting of one party’s pension, usually on a percentage basis, so that part of the pension is transferred into a pension in the other party’s name.

Pension sharing is usually the most satisfactory way of dealing with pensions on divorce, as it can ensure a fair division of pension assets. However, only about 10% of divorces involve pension sharing orders, so many people are clearly missing out.

How much is each party entitled to?

Now that we know the options for dealing with pensions on divorce, the next question is: how much should each party get?

Of course, before that can be answered we need to know how much the pensions are worth.

And valuing pensions can be quite tricky, often requiring the services of a pension expert.

In most cases the valuation used is what is referred to as the ‘cash equivalent transfer value’, i.e. the amount that could be transferred out of that pension fund into another.

Once a satisfactory valuation has been obtained, a decision can be made as to how much each party should receive. Whilst this is ultimately a decision for the court, financial advice may well be required to ensure that any arrangement works as desired.

In deciding how pensions should be split the court will take into account the same factors that it considers when deciding the financial settlement generally, such as the means of the parties, their needs, and their ages. Whether part of the pension was accumulated prior to the marriage can also be relevant.

All else being equal, and provided there is no offsetting, then a fair outcome could simply be that the pensions of each party are equalised, so that the value of each party’s pensions are the same. Again, however, expert advice should be taken as to what is a fair outcome in each case.

How can we help?

For further information on how we can help, please see our Divorce, Separation, and Finances page.

Walker Family Law is an award-winning family law practice, recognised as one of the leading family law firms in the South West of England with services covering family law & mediation, divorce law, child-law and arbitration.

Please contact us if you require any further information