A Guide to Pensions and Divorce

Going through a divorce or separation is one of the most stressful life events you can face. While you're dealing with the emotional and logistical challenges, you also have to make critical, life-changing financial decisions.

After the family home, pensions are often the single largest asset in a marriage. However, they are also the most complex and most misunderstood. Making the wrong decision - or worse, ignoring them altogether - can have a devastating impact on your future retirement.

Here, we'll explain the implications of divorce on your pensions and how an independent financial adviser can work with your solicitor to help you navigate the process and secure a fair outcome.

Are pensions included in a divorce settlement?

Yes. Emphatically.

In England, Wales, and Northern Ireland, all pensions - including workplace (both defined benefit and defined contribution) and personal pensions (like SIPPs) - are legally considered an asset of the marriage, just like property, savings, or investments.

It does not matter if the pension is only in one person's name. The value built up is considered part of the "marital pot" and must be valued and included in the financial settlement.

How are pensions valued and split?

This is the first and most critical step. Before assets can be divided, they must be valued.

• For Defined Contribution (DC) pots: This is relatively simple. The value is the total amount in the pension pot on a given date.

• For Defined Benefit (DB) schemes: This is much more complex. The scheme will provide a Cash Equivalent Transfer Value (CETV). This is the lump sum the scheme will offer to transfer the pension elsewhere.

Crucial Warning: A £100,000 CETV for a defined benefit pension is not the same as a £100,000 defined contribution pot. The DB pension provides a guaranteed income for life, which is often far more valuable than the cash value suggests. This is one of the biggest and most costly mistakes people make, and where an adviser is essential.

The three main options: Sharing, Offsetting & Earmarking

A court will decide on a "fair" split of assets, and when it comes to pensions, there are three ways to do this:

1. Pension Offsetting

This is the simplest approach. One person keeps their pension, and the other person receives assets of an equivalent value - for example, a larger share of the family home or more of the cash savings.

• Pro: It's a very clean break.

• Con: It's very difficult to value assets fairly (see the warning above). You might trade a secure, lifelong pension for a cash sum that runs out.

2. Pension Sharing

This is the most common and cleanest way to split a pension. The court issues a Pension Sharing Order (PSO), which legally splits a percentage of one person's pension.

• Pro: It provides a clean break, and both parties have their own pension assets for their future.

• Con: The person whose pension is being split (the 'debit') will see their future retirement income fall.

3. Pension Earmarking (or Attachment)

This is an older, less common method. The court orders that when the pension member retires, a portion of their income or lump sum must be "earmarked" and paid to their ex-spouse.

• Pro: It's a way to get income from the pension.

• Con: It's not a clean break. The payments stop if the ex-spouse remarries, and the recipient has no control over when the member decides to retire. Most advisers and solicitors now try to avoid this.

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What is a Pension Sharing Order (PSO)?

A Pension Sharing Order (PSO) is the legal document that instructs a pension provider to split a pension. The person receiving the share is given a "pension credit" of a certain value.

They must then decide where to move this new pension credit. This is a crucial decision. They can usually:

• Move it into a new personal pension (like a SIPP) in their own name.

• Move it into their existing workplace pension.

• Sometimes (though rarely) join the same pension scheme as their ex-partner.

This new pot is their own, to manage and grow for their own retirement.

How our independent advisers can help divorcees with their pensions

An independent pension adviser plays a vital, specialist role alongside your solicitor. Your solicitor handles the law; we handle the complex financial analysis and long-term planning.

Our services are tailored to your specific situation, whether you are the one with the larger pension or the one who needs to build their own.

For the person receiving a pension share (a "pension credit")

You have been awarded a pension pot, perhaps for the first time. This is your financial future, and it needs to be managed. We will:

• Set up your new pension: We will help you choose the right pension plan (e.g., a SIPP or personal pension) to receive your new pension credit.

• Create an investment strategy: Your new pot needs to be invested. We will take the time to understand your goals, your feelings about risk, and build a portfolio that's right for you.

• Build a new retirement plan: We will start from scratch and build you a new, personal retirement plan. We'll show you what this new pot could be worth and what you need to do (e.g., start your own contributions) to get the retirement you want.

For the person giving a pension share (a "pension debit")

Your pension has been reduced, and your retirement plan has been damaged. This can be deeply worrying, but it is not a lost cause. We will:

• Recalculate your new future: We will run a full cashflow projection to show you what your new retirement picture looks like.

• Create a "rebuilding" plan: We will create a clear, actionable plan to get you back on track. This may involve increasing your contributions, changing your investment strategy, or adjusting your target retirement date.

• Give you peace of mind: Our goal is to replace uncertainty with a clear plan, so you know exactly what you need to do to rebuild and secure your own retirement.

During the divorce and negotiation process

This is where our specialist analysis is most critical. We work with your solicitor to help you get a fair deal.

• Analyse the true value: We will analyse the CETV of a defined benefit pension and compare it to a defined contribution pot, showing your solicitor the true value of the benefits being discussed. This is essential for any "offsetting" negotiation.

• Provide clear reports: We can create simple, clear financial models that show the long-term impact of different settlement options (e.g., "Option A: 60% of the house, 20% of the pension" vs. "Option B: 50% of the house, 40% of the pension").

• Explain the jargon: We act as your "financial translator," explaining the complex pension documents so you can make informed, confident decisions.

Get started here to book a free pension review and a no-obligation chat with an independent financial adviser who specialises in helping divorcees with their pensions.