How does getting a divorce affect my pension?
When you are getting a divorce, your assets (eg your home, car and personal belongings) will be taken into account and may be divided between yourself and your ex-spouse. Your assets include your pension and, as a result, your pension may be divided between yourself and your ex-spouse.
In England and Wales, the total value of your pensions will be taken into account. The total value of your pensions is the value of all pensions you and your ex-spouse have built up (except for your basic state pension).
In Scotland, only the pensions that were built up by you and your ex-spouse during the course of the marriage or civil partnership will be taken into account. Any pensions built up before the marriage or civil partnership or after the date of separation are not considered.
State pensions
The state pension available in the UK changed on 6 April 2016, from the basic state pension to the new state pension.
Since 6 April 2016, neither the basic state pension nor the new state pension can be shared. However, any extra state pension entitlements that someone receives (eg additional state pension payments or protected payments) may be shared between ex-spouses by a court order.
How can a pension be shared between ex-spouses?
There are various mechanisms of sharing a pension entitlement between two individuals when they go through a divorce or dissolution. These include:
Pension offsetting
This method involves the partner with the larger pension value keeping their pensions intact and the other partner receiving a larger share of the other assets as part of the divorce settlements. Offsetting pensions is typically thought to be the obvious (and traditional) way to deal with things, given its minimal impact on any pension protections and the benefits of a clean break.
This seems logical in theory but can be difficult to achieve when some assets are tricky to value. This is usually the case when the home, for example, is worth more or less than the difference in value of the pensions between the partners. Some ex-spouses find themselves in a difficult position if they decide to invest their offsetting payment into a pension of their own, due to caps and restrictions that are now in place. This can mean that offsetting is an outdated method for those wishing to invest payments they receive following divorce or dissolution.
Note that pension offsetting is not possible if there aren’t sufficient non-pension assets.
Pension attachment and earmarking
Pension earmarking used to be available throughout the UK, however, it’s now only available in Scotland. In England and Wales, earmarking has been replaced with pension attachment orders.
Pension attachment or earmarking is another recognised technique used during divorces, in which the original pension scheme member holds complete control of the pension and a specified amount of pension income or benefits is passed to the scheme member’s ex-spouse when the income or benefits are drawn (ie when the pension is used). This doesn’t provide a clean break, as an ongoing link with your ex-spouse remains.
A pension attachment or earmarking order redirects part or all of an ex-spouse’s pension benefits to the other ex-spouse when they become payable. This excludes the state pension.
In England and Wales, a pension attachment order can require that all or part of an ex-spouse’s:
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pension income be paid to their ex-spouse
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pension tax-free cash be paid to their ex-spouse, and/or
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lump sum death benefit be paid to their ex-spouse
In Scotland, an earmarking order can direct that all or part of an ex-spouse’s:
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pension tax-free cash be paid to their ex-spouse, and/or
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lump sum death benefit be paid to their ex-spouse
The payments to the ex-spouse don’t start until the original pension scheme member retires. If the original pension scheme member decides not to access the pension benefits or dies before doing so, their ex-spouse cannot receive the payments either.
Payments through a pension attachment or earmarking order can be erratic, so they cannot be relied upon nor planned for, and the original scheme member is restricted in the size of the pension they can build. However, the original scheme member’s ex-spouse is still able to build up their own lifetime allowance irrespective of their earmarked or attached awards.
Pension sharing orders
Pension sharing is another option available. It provides a clean break between the couples as the pension assets are split immediately at the time of divorce. Each individual can decide what to do with their share independently.
The courts will issue a pension sharing order (PSO) stating how much of one ex-spouse’s pension the other ex-spouse is entitled to receive. In England and Wales, this is expressed as a percentage of the pension value(s) that are split. In Scotland, this is expressed as an amount.
A PSO reduces the benefits of the original pension scheme member in order to share them with their ex-spouse. This may affect the lifetime allowances (ie the total amount of pension savings that an individual can build up without incurring a tax charge) of both ex-spouses.
So which option is best?
Whilst the above options are the commonly accepted methods of dealing with pensions in divorce, they all have their failings. A changing world needs a changing approach, and it is possible that a more modern solution still must be found to ensure that pension assets are handled in a way that is fair to all parties.
You can Ask a lawyer if you have any concerns relating to pensions and divorce or you can use Rocket Lawyer’s Divorce service.
