Pensions are often the biggest asset held by a couple. However, when couples separate, many do not include these assets in their divorce settlements.
If you and your partner are considering a divorce, or have already begun the process, it’s important to consider your pensions when you agree a financial settlement. This can be particularly true for women who often come out of divorces with smaller pensions than men.
Read on to find out why you shouldn’t forget your pension assets when you divorce, and to discover the common methods used to split pensions.
Pensions are often forgotten about when dividing assets – but they shouldn’t be
No one gets married with the expectation that they’re going to get divorced. However, as reported by Professional Adviser, 41% of couples get divorced before their 25th wedding anniversary, and so the issue of dividing up pensions on divorce affects a lot of people.
Professional Adviser also reports that 73% of people who have divorced said that they did not factor pensions into their financial settlements, while 1 in 10 weren’t even aware that pensions could be shared.
However, pensions can be shared between a divorcing couple and, if you do not include your pensions in your divorce settlement, it could lead to a large imbalance in the value of you and your partner’s pensions after the divorce is concluded.
Pensions are usually held unequally in relationships
One reason to consider including pensions in a financial settlement is that pension funds are often held unequally in relationships.
As reported by Money Marketing, because one member of a couple is often the main earner, almost half of separating couples with pensions see one partner holding 90% of the couple’s combined pension wealth.
This is a particularly big problem when you consider the fact that a pension can be the biggest asset in a marriage, especially if the couple has been together a long time. The Telegraph reports that pensions make up 40% of wealth in the UK – that’s greater than property at 38% – so divorcing couples should consider what happens to their pensions carefully.
In terms of pensions, women often come out of divorces worse off than men. Tim Pike, head of modelling at the Pensions Policy Institute, said in a piece published by the University of Manchester “divorced women have very little pension and significantly less than married women.”
The method used to split a pension can greatly affect how each party comes out of a divorce. Some methods can create a clean break for a couple while others can leave them financially involved for decades.
How pensions are split – the 3 common methods
There are three common methods used to divide pensions between a divorcing couple.
To divide pensions using the pension sharing method, a Pension Sharing Report is usually created. This outlines the value of each spouse’s pension funds making it possible to fairly divide the assets.
The divorcing couple or the court then decides how the pensions should be split (using a Pension Sharing Order) and any funds can be transferred from one party’s pension into a new or existing pension belonging to the other party.
The pension sharing method can be fair and provides a clean break for a couple.
When using the earmarking method, one party can receive a lump sum or income from their former spouse’s pension in the future.
This does mean that a divorced couple remain financially involved with one another for potentially decades. In addition, the receiving party has no control over the pension and must wait until their ex-spouse accesses their pension before they receive any money from it.
When using offsetting to split a pension after a divorce, clients offset the value of the pension against other assets.
For example, if pensions and the family home were worth roughly the equivalent amount, one party might take the pension wealth, while another – often the female party if there are children involved – prefers to take the family home.
While this may seem equitable, it means that the party who takes the property often has a shortfall in income in later life, as they don’t have the same level of pension savings.
To stop this from happening to you it’s important to include pensions in your divorce settlement and choose the approach that is best for you.
Get in touch
If you are going through a separation or are divorced and you want to understand how a financial plan could help you to build your new future, we can help.
As an Essex financial planner, we work closely with many divorcing clients. To find out more, please email firstname.lastname@example.org or call us on 01245 984546.
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 not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.