Divorce and pensions: a guide to fair settlements

Going through a divorce can be incredibly challenging, especially when it comes to dividing finances. Understandably, most people focus on their immediate financial needs, the family home, savings, and child arrangements. So, it’s unsurprising that one major asset is often overlooked: pensions.

In this article, Senior Consultant Family Solicitor Georgina Chase discusses pensions in divorce and how a fair settlement can be reached.

Why you shouldn’t overlook pensions in divorce

Pensions often form the most valuable asset on divorce and in some cases, can be worth more than the family home. Pensions can provide long-term security, helping meet income needs upon retirement. Therefore, understanding how they can be valued, divided, and protected upon divorce is essential for safeguarding your long term financial future.

Pensions held by you and your spouse may be unequal. For example, if one spouse works full time during the marriage and grows significant pension benefits, while the other has a smaller pension as they work part-time or focus on bringing up children and running the household.  

Both are considered equal contributions to the marriage, as the non-financial contribution of the homemaker/ part-time worker sometimes enables the other spouse to prioritise work. Marriage is considered a joint venture, and it is considered fair to share pensions between spouses upon divorce to ensure both have sufficient retirement income.

How are pensions divided in divorce (UK)?

Pensions are most commonly divided in two ways:

• A Pension Sharing Order: sharing the pension pot at the time of the divorce.
• Offsetting: where pension is traded for capital or money now, allowing one party to retain their pension rights.

However, the difficulty with offsetting lies in comparing very different types of assets, such as a pension as a future whole-of-life income stream, against cash, housing, or other non-pension assets. Due to this, a Pension Sharing Order is usually the court’s preferred approach over offsetting.

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How are pensions valued for divorce?

In order to determine whether there will need to be a Pension Sharing Order on divorce, and as part of the duty to provide full and frank financial disclosure, both spouses are required to disclose the value of their pensions. This is known as the Cash Equivalent Transfer Value (CETV), and it is the value that your pension would be given if you could transfer it. You can request the CETV from your pension provider.

What is a PODE?

The Pensions Advisory Group (PAG) provides guidance that, where CETVs have a value of over £100,000, a Pension on Divorce Expert (PODE) report is to be obtained before the pension claim is determined. A PODE is usually instructed jointly by both parties via their solicitors at joint cost.

A PODE should be instructed to identify the true value of the pension, as often the CETV does not accurately reflect what the benefits are worth or might cost to replace, particularly for final salary or public sector schemes. PODE input is also required to consider offsetting of a Pension Sharing Order claim.

PAG advises that, for pension claims in divorce, the date you started cohabitation (living together) is treated as the same as the date of the marriage. In medium to long marriage “needs-based” cases, where the pension makes up a large part of the total assets, the timing and source of the accrual of pension is unlikely to matter.  This means that pensions built up before you lived together won’t be ringfenced, and can be included in the pension claim, as meeting needs come first.

How to ensure pensions are not overlooked

• Seek advice from a solicitor experienced in dealing with pensions.
• Make sure the up-to-date CETVs of all pensions are disclosed.
• Consider with your solicitor whether a PODE report is required, before financial claims upon divorce are determined.

Pensions and divorce FAQs

If you’re unsure how your pension may be affected by divorce, contact Georgina for tailored advice and to book a free 30-minute consultation.