3 common ways to split a pension after a divorce

During your clients’ divorce proceedings, their primary focus is likely to be on their shared home and childcare arrangements.

While this is understandable, it is important that they don’t neglect other significant assets, such as their pension.

Aside from property, pensions are often among the most valuable assets a person can own. However, despite their potentially considerable value, research by Which? revealed that 71% of couples don’t include their pensions in their divorce settlement.

If your client was married or in a civil partnership and is going through a divorce or dissolution, they may be entitled to some of their partner’s pension, or vice versa.

In England, Wales, and Northern Ireland this normally means a portion of the total value of the pension. In Scotland, it usually means the value of the pension accrued during the course of the marriage or civil partnership.

Read on to discover the three common ways to split a pension after a divorce.

1. Pension sharing

Pension sharing is an effective method to ensure two divorcing partners divide their pensions fairly.

The court issues a Pension Sharing Order (PSO) based on a careful calculation of the pension’s value, and a determination of an equitable split between the partners based on their circumstances.

The pension credit is then paid directly into the recipient’s pension upon the completion of the settlement, rather than them having to wait for their ex-partner to access their pension before the payments are initiated.

This can be an attractive option as it allows the ex-partners to make a clean financial break from one another and doesn’t keep them tied together throughout their retirement.

Both partners should carefully consider how pension sharing could affect their retirement plans and ensure they are adequately prepared.

For this reason, it is advisable that your clients speak to a financial planner before choosing this option.

2. Pension earmarking

Pension earmarking, sometimes called “pension attachment”, gives Person A a portion of Person B’s pension when Person B starts to draw from it.

Pension earmarking can either be a specified figure or a percentage of the total pension, depending on what was determined during the legal proceedings. The court instructs the pension provider to make payments to both divorced partners as per the agreement.

One of the main issues with pension earmarking is that it ties the ex-partners’ finances together for a potentially long period beyond their relationship.

For example, if the pension holder decides to delay accessing their pension, the other partner’s financial security may be compromised, as they will also have to wait for those funds. This dependency can create ongoing financial uncertainty and tension long after the divorce is finalised.

So, if your clients choose to earmark one of their pensions in a divorce settlement, it is crucial that both parties understand their financial standing and the potential long-term implications.

Clear communication and thorough financial planning can help ensure that both individuals are aware of how delays or changes in pension access could affect their future financial security.

3. Pension offsetting

The third common way of splitting a pension after a divorce is pension offsetting. In this situation, one partner receives a larger share of other assets in return for forgoing their entitlement to their ex-partner’s pension.

For example, if the value of a pension and a property are broadly the same, one party might prefer to take the property asset while the other retains the pension.
Like pension sharing, pension offsetting offers the partners a clean financial break from one another.

One of the difficulties with pension offsetting is calculating the exact value of a pension, considering it can grow exponentially over time, and agreeing on the assets it is equal to.

Moreover, other assets of a similar value may be less likely to generate income in retirement. For example, if one partner keeps the property instead of splitting their partner’s pension, though they can live in the property, it may leave them with an income shortfall in retirement.

A financial planner can help your clients ensure they are financially prepared for retirement. They can explore alternative ways of generating income if your client forgoes access to a portion of their ex-partner’s pension.

A financial planner can help determine which pension-splitting option would best suit your clients

A divorce is likely to be a stressful and challenging time for your clients, filled with emotional and financial complexities.

A financial planner can provide invaluable assistance by helping them to navigate some of these challenges and, among other things, determine which pension split would best suit them, giving them one less thing to worry about.

A financial planner can also help to ensure that both parties fully understand the value of their pension assets, explore division options, and develop a comprehensive strategy that secures their long-term financial wellbeing.

By offering clear guidance and support, a financial planner can help your clients achieve a fair settlement, reducing stress and fostering stability for their future.

If you have any divorcing clients who could benefit from financial planning, we would be happy to assist.

Email info@fbwealth.co.uk or call us on 0333 1122211.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.