How Are Pensions Split in Divorce?
Dividing assets can be complex when a marriage ends in divorce, and pensions are often one of the most valuable assets. While pensions may seem like an afterthought compared to the family home or savings, overlooking them can lead to an unfair settlement. Understanding how pensions are divided in a divorce and the various methods available is essential for ensuring a fair financial future.
In this blog, we’ll explore how pensions can be split in divorce, the advantages and disadvantages of each method, and how decisions about pension division are made.
1. Pension Sharing Order
What is it? A Pension Sharing Order allows for a pension to be split between both parties. A percentage of one person’s pension is transferred into the other’s pension pot, creating two separate pensions. The receiving spouse, independent of their ex-spouse, will have complete control over their share.
Advantages:
Financial Independence: Each person has their own pension pot and can make decisions about it, such as when to take it or how to invest it.
Fairness: A Pension Sharing Order is often seen as the fairest option, particularly when one spouse has a much larger pension.
Clear Split: Once the pension is split, both parties are financially separate in terms of pensions.
Disadvantages:
Costs: Setting up a Pension Sharing Order can be expensive, often involving legal and administrative fees.
Complexity: Some pension providers may have specific rules, which can complicate the process. Luckily, I can help with this.
2. Pension Offsetting
What is it? Pension offsetting allows one party to retain their pension while the other receives a greater share of other assets, such as property or savings. For example, one spouse might keep the pension, and the other could take a larger share of the family home to balance things out.
Advantages:
Flexibility: This approach can be helpful if one person prefers to keep the pension while the other would rather receive assets that are more accessible in the short term, like cash or property.
Simplicity: There is no need to split the pension, which can avoid some administrative complexities.
Disadvantages:
Potentially Unfair: If not carefully calculated, offsetting can lead to an unequal settlement, particularly as the long-term value of pensions might outweigh the value of immediate assets like property.
Difficult to Value: Pensions can be tricky to compare directly with other assets, as their future value can grow significantly over time, unlike property or savings, which may not appreciate as much. This is another reason why seeking advice is important. Financial advisers can help determine current values, and if necessary, actuaries will value them. In some cases, there are different methods to value pensions, and you don’t have to accept the first offer.
3. Pension Attachment Order (Earmarking)
What is it? A Pension Attachment Order, also known as earmarking, means that when one party starts drawing their pension, a portion of it is paid to their ex-spouse. This differs from Pension Sharing because the pension is not split upfront, and the receiving spouse only gets their share when the pension holder starts accessing their pension.
Advantages:
No Immediate Action: There is no need to divide the pension right away, which can be simpler if the pension holder is still far from retirement.
May Suit Some Situations: This option might be appropriate where both parties prefer to maintain the pension intact until it is paid out.
Disadvantages:
Lack of Control: The receiving spouse depends on their ex-partner’s decisions about when to retire and how to access the pension, which could delay their financial planning.
No Independence: Unlike Pension Sharing, this option does not give financial independence, and payments are contingent on the ex-spouse's future actions.
Ceases Upon Death: If the pension holder dies, the attached payments may stop, leaving the receiving spouse in a difficult financial situation.
Ceases Upon Remarriage: The attached payments may stop if the receiving spouse remarries.
Who Decides How Pensions Are Split?
The method used to divide pensions in a divorce is usually decided by agreement between the divorcing couple, often with the help of legal and financial professionals. If an agreement cannot be reached, the courts will step in to decide.
Key factors that influence the decision include:
Fairness: The goal is to achieve a fair division of assets. Pensions can be particularly important if one spouse has significantly more savings or earning potential than the other.
Personal Preferences: Some couples prefer pension offsetting if one party wishes to keep the pension while the other prefers more immediate assets. Others may choose pension sharing to ensure a clean break.
Advice from Professionals: Solicitors, financial advisers, and pension experts can provide guidance on the most suitable option based on the specific circumstances of the couple.
Court Decision: If the couple cannot agree, the court will step in to decide, considering all factors such as the length of the marriage, contributions made by each spouse, and their future financial needs.
When to Seek Advice
Given the complexity of pensions and the variety of options available for dividing them, it’s crucial to seek advice from a financial planner and legal expert early in the divorce process. Pensions are long-term assets, and making the wrong decision could impact your financial security for years to come.
An adviser can help you:
To understand the value of the pension(s) involved.
Comparing pension sharing, offsetting, and attachment to find the best solution for your situation.
To ensure the division of assets is fair and considers your long-term financial future.
Conclusion
Dividing pensions in a divorce requires careful consideration, as it can significantly affect both parties’ financial futures. Each method, Pension Sharing, Offsetting, and Attachment, has its own set of advantages and disadvantages. The right choice depends on individual circumstances, including the size of the pension, the value of other assets, and personal preferences for financial independence or simplicity.
To make the right decision, it’s essential to seek professional advice. Financial advisers and legal experts can guide you through the process and ensure your settlement is fair, leaving you better prepared for the future.
If you’re going through a divorce and need help understanding how pensions fit into the settlement, feel free to get in touch for expert advice on:
Jamie Lowe- Financial Adviser and Director of True Self Wealth Ltd
Get in touch: 07469 712299 Jamie.Lowe@SJPP.co.uk
To find out more, visit www.truselfwealth.co.uk
To book an appointment, visit www.calendly.com/jamie-lowe-tsw
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