What happens to pensions on divorce?

Alexandra Goldrein (partner) and David Miles (solicitor) in our Family Law team have written the below guide to help you understand some of the key issues concerning pensions in divorce.

Pensions can be extremely valuable, sometimes more so than the family home, but they are often disregarded or not addressed properly in divorce settlements, leading to spouses (often wives) walking away with less than they should.

Unfortunately, pensions can be overlooked because they may seem complicated, remote, or perceived as an asset that can only belong solely to your ex. It is vital to understand that the family court is empowered to make pension sharing orders that provide fairness.

Even if you are unfamiliar with pensions, it is very important to think about the income you will need when you retire or can no longer work as you approach retirement age. If pensions are not considered properly within the divorce, you may not achieve a fair financial outcome and could face difficulties later in life. If you have taken a career break to raise children or care for others, your pension pot may be significantly smaller than your spouse’s.

The prospect of divorce can be a daunting one, and if you are not familiar with how pensions work, or why they are so crucial to your financial wellbeing, this short guide is for you.

What is a pension sharing order?

A pension sharing order is a family court order that divides a pension between divorcing spouses and is the main power available to the family court in relation to pensions.

It creates what is known as a ‘pension debit; for the member spouse (i.e. the spouse with the pension) and a ‘pension credit’ for the non-member spouse (i.e. the spouse receiving the benefit of the pension sharing order). This allows the non-member spouse to receive a share of the pension in his or her own right, either within the same scheme or transferred to another pension scheme of their choice. The order must be expressed as a percentage of the relevant pension.

Pension sharing orders are the most common way of dividing pension resources between divorcing spouses. Under the relevant legislation (the Matrimonial Causes Act 1973), the family court can make a pension sharing order either at the time of the divorce or after the final divorce order (previously known as the final order of decree absolute) is granted.

What is a pension attachment order?

A pension attachment order, also known as an ‘earmarking order’, directs the pension provider to pay a portion of the pension benefits (such as lump sums or income) to the non-member spouse when the member spouse starts drawing their pension. Unlike a pension sharing order, the non-member spouse does not gain independent ownership of the pension benefits. Pension attachment orders are less commonly used today due to their limitations, such as ceasing upon the death of the member spouse or the remarriage of the non-member spouse. They have been effectively superseded by pension sharing orders, which generally speaking provide greater security and independence for the non-member spouse.

What is a CETV, and does it equate to a pension’s true value?

The CETV (‘cash equivalent transfer value) represents the cash value of a pension if it were transferred out of the pension scheme. While it is commonly used in divorce proceedings, it may not always reflect the true value of the pension, particularly for defined benefit schemes. Factors such as the scheme’s funding status, the member’s age, and the scheme’s rules can affect the accuracy of a CETV. In such cases, instructing a PODE (‘pensions on divorce expert’) will be essential to ensure the valuation and percentage sharing figures are accurate.

A PODE is a specialist professional, often an actuary or financial expert, who provides independent advice and calculations regarding pension assets in divorce or dissolution cases. Their expertise is particularly important when pensions form a significant part of the marital assets, as pensions can be complex to value and divide fairly. The family court often relies on the input of a PODE to ensure that pension sharing arrangements are equitable and tailored to the spouses’ specific circumstances.

What are some of the key issues with pensions and divorce?

The key issues with pensions and divorce include accurately valuing pensions, understanding the implications of different types of pensions (especially how defined benefit and defined contribution schemes differ), and ensuring fairness in how the pensions are shared.

The CETV is often used to value pensions, but it may not always reflect the true value, particularly for defined benefit schemes. Timing is also crucial, as delays in implementing pension sharing orders can lead to financial disadvantages (prematurely finalising the divorce can also cause serious issues, especially for the receiving spouse). Additionally, the impact of pension freedoms, which allow members to access their pensions flexibly, must be carefully managed.

What are silver divorcees’ pension rights?

‘Silver divorcees’, i.e. older individuals divorcing later in life, often face unique challenges regarding pensions. These challenges may include:

• Income needs in retirement: For older individuals and retirees, pensions often represent the primary or sole source of income. Dividing pensions without careful consideration of their income yields can seriously affect the standard of living of the less financially secure spouse.
• Pension freedoms and risks: Pension freedoms (which were expanded significantly from April 2015) allow individuals to access their pension pots flexibly, but this can create risks. For example, one party may withdraw significant funds before a pension sharing order is implemented, reducing the value available for division.
• Valuation complexity: Although not an issue that is unique to silver divorcees, the valuation of pension benefits can be complex, particularly for defined benefit (DB) schemes or pensions in payment. A pension’s CETV may fluctuate significantly over time (known informally as ‘moving target syndrome’), complicating negotiations and implementation. This is especially problematic for silver divorcees as the value of these pensions is typically greater than for younger individuals who are still contributing to their pension pots.
• Implementation delays: Delays in implementing pension sharing orders can arise due to uncooperative parties or incomplete documentation. For older individuals nearing retirement, such delays can create financial uncertainty and disrupt retirement planning. The family court may include directions to ensure timely compliance by both spouses.

Ultimately, pensions are typically among the most significant resources in financial cases on divorce. Ensuring adequate provision for retirement is critical. While pension sharing orders provide a mechanism for achieving fairness in divorce, the unique challenges faced by silver divorcees require careful planning and expert advice to ensure that their financial needs in retirement are properly addressed.

What should you consider in relation to pension sharing orders regarding NHS or teachers’ pensions?

NHS and teachers’ pensions (as well other public sector pensions) are defined benefit schemes, which can be complex to value. The CETV may not reflect the true value of these pensions, and, as above, expert advice from a pensions on divorce expert (PODE) is often necessary.

Get in touch

Alexandra Goldrein, Partner in the Family Department. She specialises in all areas of private family law work, including relationship breakdown, divorce, financial settlements and children arrangements.

David Miles is a Solicitor in the Family team and is based at out Manchester office.

If you are looking to understand more about your legal position on divorce, contact one of our expert family solicitors today on 0330 111 3131 or via our online enquiry form.