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
Yes, an ex-spouse may be able to claim against your pension after divorce if you do not have a financial order in place to prevent this. This is just one of the reasons you should ensure a binding financial order is in place upon divorce.
A Pension Sharing Order is a court order that divides pension benefits between divorcing spouses. It allows for a portion of one spouse’s pension to be transferred to the other, ensuring pensions are shared fairly and that both parties have security for the future.
No, a PODE report isn’t always required. But it’s strongly recommended if pension values exceed £100,000 or involve final salary or public sector schemes. A PODE report ensures the pension is accurately valued and that any division is fair.
No, you don’t usually need to attend court to get a financial order unless you and your ex-spouse cannot come to an agreement and have exhausted other options, such as mediation. Instead, once you have agreed on your financial arrangements, including pensions, you can submit a court order for approval.
Possibly. This is called offsetting, where one spouse keeps their pension in return for giving the other a larger share of another asset, like the family home or savings. However, offsetting is usually not the preferred solution by the courts, as it must be carefully calculated to ensure it’s fair and that both parties’ needs are met.
It is strongly recommended that you work with a solicitor who’s experienced in dealing with pensions during divorce. Pensions can be one of the most complex and high value assets in a divorce settlement. Working with a solicitor. Working with a solicitor will ensure assets are properly valued and divided fairly, protecting long-term financial security for both parties.
Pensions are included in the matrimonial pot to be divided on divorce. Whether you will have to share your pension on divorce (and how much you will have to share) depends on the value of each spouse’s pension and each spouse’s future financial needs on retirement.
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.
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