Is a Pension Protected from Divorce? – An In-depth Guide

Divorce is a complex legal process that involves the dissolution of a marriage, and when it comes to dividing assets, pensions are often a significant consideration. 

Pensions are considered marital assets and their division can have long-term financial implications for both parties involved. 

We’re a law firm that has dealings in divorce and family law so we understand this subject in great detail.

Here’s a guide to help you understand the key aspects of divorce and pensions in the UK.

Types of Pensions

  • Basic State Pension – A regular payment from the government, the amount of which depends on your National Insurance contributions.
  • Workplace Pensions – Employer-sponsored pension schemes offered to employees. These can be defined benefits or defined contribution schemes.
  • Self-Invested Personal Pension (SIPP) – A personal pension plan that provides more flexibility and control over investment choices. This allows you to choose a wide range of investments.
  • Defined Contribution Schemes – Alongside workplace pensions, you can set up defined contribution schemes which are private pension schemes that make investments with your contributions.
types of pension

Do Pensions count as an asset in Divorce?

All pensions can be used when dividing assets in a divorce no matter when they were accrued or opened. 

Do all Pensions Count as an Asset?

There can be several factors that affect this, including section 25. This is the Matrimonial Causes Act 1973.  

The Matrimonial Causes Act 1973 is an important piece of legislation in the United Kingdom that deals with matrimonial law, including the legal aspects of divorce. 

The act outlines the grounds for divorce, the procedures to be followed and the financial settlements that may arise as a result of divorce proceedings.

Key provisions of the Matrimonial Causes Act 1973 include:

  • Grounds for Divorce.
  • Financial Settlements.
  • Welfare of Children.
  • Legal Procedures.
divorce assets

Do You Need to Disclose Old Pension Funds From Before the Marriage?

In short, yes. 

All pensions old or new, need to be valued for full disclosure so your consent order can be made legally binding. 

Your signature will be added to a document that is legally binding which claims you have disclosed every asset you own. 

How is a Pension Valued in a Divorce?

There are different methods you can use to determine the value of your pension. These include:

  • Cash equivalent value – This is also known as a CEV, CETV, CE or transfer value. If you’ve not started receiving payments yet from your pension you’ll need to ask for a cash equivalent value. This will give a cash value to the pension fund, but in some cases, you may not get a true value of the pension fund using this method. If you request a CEV from your pension provider they usually have to provide you with this figure within a 3 month period.
    • It is important to note that the cash equivalent value is not necessarily the most important value and in particular, with defined benefit pension schemes, the contractual benefits i.e. annual income, commutable lump sum, widows pension can often be incorrectly valued when using only a CEV and they have hidden values to them
  • Pension on divorce expert (PODE) – As mentioned, using the CEV may not give you the true value of your pension. If this happens you can hire an expert on the matter to help you acquire the true value. Pension experts can consider various factors and provide you with a comprehensive valuation of your pension. Depending on the complexity of your situation these experts can cost from £1500 – £5000.    
  • Actuarial valuation – For defined benefit pension schemes, an actuarial valuation may be required to assist in the understanding of the true value of in particular, defined benefits, pension schemes and how on divorce this would be shared to achieve most likely equality of income in retirement. This involves assessing the present value of the future benefits that the pension will provide. Actuaries use various factors, such as life expectancy and expected investment returns, to calculate this value.

Do You Have to Get an Actuary to Assist with Advising as to Pension Sharing?

pensions and divorce.

You don’t need to use an actuarial valuation to get your pension valued. 

It’s important to note that if the matter is contested in court then they will likely want such valuations when making their decision. 

The option is there if you require it but the decision on how you value your pension is up to you. 

However, when pensions have substantial value and complex parts to them, most likely defined benefits, the court will want a single joint expert called an Actuary to advise them on how the pension should be shared to ensure fairness between the parties.

Is the State Pension Shared? 

The state pension is not used as an asset in divorce proceedings. 

The State Pension is considered a non-contributory benefit provided by the government, and its distribution is not within the control of the divorcing couple or the family court. 

Each individual is entitled to their state pension based on their National Insurance contributions.

However, an actuary may require knowledge of the state pension benefits accrued by either party when calculating how to achieve equality of income in retirement.

What are the Options to Split a Pension in a Divorce? 

In divorce cases, when it comes to splitting pensions, there are several options available. Here are some common options:

  • Pension sharing – This involves dividing a pension at the time of divorce. A Pension Sharing Order is issued by the court, specifying the percentage of the pension’s value that will be transferred from one spouse’s pension fund to the other’s. This creates a separate pension fund for the recipient spouse.
  • Pension offsetting – Instead of physically dividing the pension, the court may offset the value of one spouse’s pension against other marital assets. For example, the spouse with a significant pension may retain it, but the other spouse might receive a larger share of other assets such as the family home or savings.
  • Pension attachment/earmarking – This involves earmarking a portion of one spouse’s pension benefits for the other spouse. When the pension-holder starts receiving benefits, a percentage is paid directly to the ex-spouse. This option is less common.
  • Pension Off-cuts – This term refers to the situation where a pension is divided, but only part of it is shared, leaving the rest intact. This might be suitable when a clean break is desired, but the parties agree to share a portion of the pension.
  • Pension Compensation Order – In some cases, the court might award the non-pension owning spouse a greater share of other marital assets to compensate for not receiving a share of the pension.
Is a pension protected during a divorce - Feature Image

What are the Options for a Pension Sharing Order?

These are the options available to you when it comes to a pension sharing order. 

  • Equality of Income in Retirement – This option is used to work out a fair division to equalise income in retirement. The spit is usually done using a PODE or an actuary. If you’re closer to retirement age e.g. above 40 years of age then this option will usually be used. 
  • Equality of Split based on Expert Value – In this scenario, the goal is to standardise the value of your pension based on its current capital worth. For instance, a £400,000 NHS pension may not be equivalent in value to a £400,000 NEST pension. A PODE or Actuary can calculate the precise valuations for each pension and determine an equitable division of the pension funds.
  • Percentage Split of Pensions Using Cash Equivalents – If the pension funds are of modest size or uncomplicated, you might opt to solely utilise the cash equivalents to determine an equitable distribution of assets.

What are the Timescales for a Pension Share?

A pension share becomes viable only during divorce proceedings, following the pronouncement of the final divorce order (or the decree absolute, as per the previous law). 

The consent order accompanying the divorce will include a pension-sharing annex, directing the pension company to execute the transfer. 

They are allotted a four-month timeframe to complete this transfer, and the valuation is based on the pension fund’s value at the time of the final divorce order or decree absolute.

Not the date of:

  • Separation. 
  • Financial disclosure. 
  • The agreement’s date.

It’s important to ensure that the figures in your consent order are current and that the agreement remains equitable at the time of finalising the divorce. 

In some instances, the percentage split may have been agreed upon over a year before its execution. 

It’s crucial to be mindful of the potential fluctuations in pension fund values, given their direct connection to the global economy and stock exchanges.

Helping You Understand Your Pension During a Divorce

A divorce can be a highly emotional time for all involved. This is especially true when it comes to the financial side of things.

After all, you want to ensure you’ve got financial security once your divorce is finalised.

At Brown Turner Ross we have the skills and expertise to help you navigate the turbulent times of divorce.

Our staff are here to help you cover a range of divorce issues, including:

  • Child arrangements
  • Asset divisions
  • Pension sharing.

For anything related to divorce proceedings, we can be your guiding light and source of contact.

Please reach out to us today if you have any more questions regarding what has been discussed in this article.