Pensions and Divorce – How Will I Be Affected?
Under the Pensions Act 1995, it is a mandatory requirement that pensions are taken into consideration in a divorce. For many, their pension may be one of the highest value assets they own. As such, the degree to which a divorce will affect a pension will often be of great concern to divorcing couples, particularly those in later life who have made substantial contributions towards their pension or those who are already retired and benefiting from their pension. Pensions will be affected by the cost of legal fees as well as splitting up any assets, meaning financial impact can be severe.
If you divorce or dissolve your civil partnership then you must disclose all of your assets as part of the divorce process. This includes any pensions you have built up or are claiming.
The pension assets that can be divided between you and your former spouse include:
- Workplace pensions
- Personal pensions
- Additional State Pension (but not the basic State Pension)
Pensions are considered in divorce settlements irrespective of their value, and regardless of when you made the contributions – even if this was before you were married.
Are State Pensions affected?
Some elements of your State Pension entitlement are also taken into account when you divorce.
However the implications will differ depending on whether you reach State Pension age before or after the 5th April 2016.
If you reached state pension age before 5thApril 2016, the basic State Pension cannot be shared on divorce or dissolution of a civil partnership. Former partners may however still be able to claim a basic State Pension that is based on their ex-partner’s National Insurance Contribution history. This does not affect the amount of basic State Pension that your ex-partner receives. However, if you remarry or enter a civil partnership before you reach State Pension age then you lose this right.
Any additional State Pension benefits such as SERPS or the Second State Pension (S2P) can be split shared on divorce or dissolution of a civil partnership through a pension sharing order. If a pension sharing order is granted, your additional State Pension may increase or decrease, depending on the Court’s decision.
If you reach State pension age on or after 6th April 2016 (even if you defer taking your State Pension) andyou divorce on or after 6 April 2016, it may be possible to be granted a pension sharing order over part of an ex-partner’s ‘Protected Payment’. This is any additional State Pension benefits that are built up before 6 April 2016. However the main element of the new State Pension is not permitted be shared.
Pension settlement options to consider
Pension sharing allows you to have a share of up to 100% of any one or more of your ex-partner’s pensions. This can be achieved by transferring a pension into your name or by joining the existing pension scheme. If the pension is being transferred and you don’t already have your own pension, you would need to set one up.
A fair settlement can be achieved through pension sharing because part of the pension is yours and so, there is no issue around control over income or assets. Therefore, assets are transferred across, providing control and a tax rate that is set at your own rate.
Deferred pension sharing
This type of settlement is used where one party is already claiming their pension but the other is too young to retire and claim. An agreement is made to share the pension at later date. However this type of arrangement can be more complicated to set up therefore legal costs can potentially be higher.
Deferred lump sum sharing
This is where you receive a lump sum payment from your ex-partner’s pension when they retire.
Pension offsetting allows you to offset the value of any pensions against other assets. This could for example allow one partner to have the family home in return for the other partner retaining their pension.
Pension offsetting is generally the most straight forward, where for example your former partner can keep their pension while you have the family home and no court order is required. There is a short-term gain from having the house but it could mean that your income is reduced in the long-term. There is also a warning that comes with pension attachment because of the way in which you are left waiting for your ex to begin drawing their pension.
A pension attachment order allows you to have a share of any of your ex-partner’s pensions once they start to claim. The share can be the pension income, a lump sum or both.
Pension splitting after retirement
If one or both of you have retired, it is possible for pension assets to be split but there could be difficulties. For example, it is not possible to take a lump sum from the pension of your ex-partner if they already receive an income
Why take advice?
Pensions can be a complex area, adding to the complications of a divorce. Regardless of the size and number of pensions concerned, it is best to take legal advice on your options and potential entitlement as part of a divorce financial settlement.