What happens to pensions after a divorce?

3rd February 2016

Divorce is one of the most stressful and emotionally draining life events that anyone can go through. From custody of children to the question of who will ‘get the house’, the range of difficult issues to be addressed can seem endless.

Just when you thought you were close to getting through the details amicably, along comes another complex matter: pensions.

Here we’ll look at the three main ways of dealing with pensions when a marriage comes to an end.

1) Pension offsetting

If you decide to go down the offsetting route, your pension benefit (and that of your spouse) is given a cash value. This is normally based on the cash equivalent transfer value, but might also take account of lost death benefits.

These values are then taken into account in the marital balance sheet when assets and liabilities are weighed up. You and your spouse keep your own pension benefits, with other marital assets being traded off against them to balance the divorce or dissolution settlement.

The spouse with the smaller pension is allocated more of the couple’s non-pension assets to balance the extra pension benefits belonging to the other party.

The good thing about offsetting is that it offers a clean break between the parties. It’s also cheap and straightforward to set up. There are, however, several drawbacks – not least the fact that one former spouse could be given the house but have no income to run it.

2) Pension earmarking

This involves part of a divorcee’s retirement benefits, and/or lump sum death benefits, to be paid to their former spouse or civil partner following retirement or death.

The earmarked benefits continue to belong to the divorcee, meaning he or she can normally control when any pension payments start.

You can transfer your pension benefits after you become subject to an earmarking order, but the trustees of the transferring scheme must inform the trustees of the receiving scheme.

If earmarked pension rights are transferred, the former spouse or civil partner must be told and given contact details for the new scheme. The process of earmarking will then begin again.

3) Pension sharing

Introduced in 1999, this involves pension rights being divided at the time of the divorce or dissolution. When a sharing order is made, part of your pension rights are awarded to your former spouse as a pension credit.

This provides them with pension benefits in their own right, with a corresponding pension debit being recorded against your benefits.

One of the biggest advantages is that each party has independent pension benefits in their own right, under their control. Neither party’s rights are affected by the other’s subsequent death or remarriage.

It’s worth bearing in mind, however, that in return for the pension share, your former spouse will receive less of your (the couple’s) non-pension assets. This could leave them with financial problems.