The Ultimate Guide to Pensions on Divorce
One of the more complicated areas of a financial settlement on divorce is the issue of pensions. There are different types of pensions; different options to share a pension and then you also need to work out how to value them correctly. It can be a real headache and is one of the areas our team at Mediate UK are often asked for help with. We have produced this guide to try and answer the most common questions.
As always, and especially in such a complicated area as this, you should take independent legal advice alongside good financial advice before you commit to any important decisions about your pension on divorce. A seemingly innocent mistake now could cost you tens of thousands of pounds in your retirement.
In July 2019, the Pension Advisory Group (PAG) produced a report that showed many legal practitioners and judges themselves were not clear on pensions and that there was much misunderstanding on how they work. Whilst 80% of financial consent orders looked at in the study had a private pension, only 14% contained a pension sharing order.
In addition to this recent caselaw sought to expand on the PAG findings. It is an interesting case on how pensions should be treated, especially with regards to equality of income in retirement and how the practise of ring-fencing assets prior to the marriage was not always correct – as need must be the critical factor in deciding what is and is not a marital asset.
Take a look at the above link. It is not too full of legal jargon(!) and explains the case law on equalising pension payments in divorce and how there is a high risk to off-setting a pension against a current asset (ie the former marital home). It is highly relevant therefore for most discussions on what the law is about pensions on divorce.
Let’s start with some basics
What is a pension?
A pension is a tax-efficient way to save money for when you retire and no longer have an income. Ideally your pension will cover your living costs in retirement.
What type of pensions are there?
There are four main type of pensions we will look at in this guide:
- Defined Contribution – The most common type of pension fund. You and your employer will pay in a regular amount into the pension fund and you receive a monthly payment when you retire. It is defined by the contributions made.
- Defined Benefit – Also known as a final salary pension. The amount paid out will depend on your salary and length of time with employer. It is defined by the benefit you receive.
- Self–Invested Personal Pension (SiPP) – A SIPP allows you to save, invest and build up a pension pot for you to use in retirement. It has more flexibility on the investment options you have.
- State Pension – Paid through your National Insurance contributions (NI) these cannot be shared as part of a divorce, but can be taken into account when looking at future income and also where NI contributions have been missed during the marriage. Please note: If you paid into the second state pension prior to contracting out, or if you never contracted out, the second state pension can be shared.
Do pensions count as an asset on divorce?
The short answer is yes. All pensions, irrespective of the length of the marriage and when they were accrued need to be disclosed as part of your financial disclosure. You cannot get a legally binding financial consent order without disclosing the value of all you pensions.
Do pensions get shared as part of a divorce?
They can do. And this will be by agreement between you, or ultimately a court will decide what is going to happen to them if you can’t agree.
Why is my pension counted as an asset?
Under family law you need to disclose anything of value over £500. This will usually include your pension fund. Pensions are counted as an asset of your marriage under law. This is because the pension may be needed to ensure a fair agreement is reached and both parties can then get a clean break. Family law is based on meeting future needs and a court will want to see you have considered these future needs for both of you in your overall agreement.
Do all of my pension count as an asset?
This depends on several things, including the Section 25 factors (factors a court uses to determine a fair agreement on divorce). It is affected by the length of the marriage and/or length of relationship prior to marriage.
- Couple A have been married for 4 years and are in their early 30’s
- Couple B have been married for 15 years and are in their 50’s
- Couple C have been married for only two years, but were living together for 20 years immediately before
- Couple D have been living together for 12 years and have 2 children together. They are not married.
The court would treat each of these situations quite differently. Let’s take a look why:
Couple A have been married for 4 years and are in their early 30’s
This is a short marriage. They are both many years away from retirement so have plenty of time to build up a pension fund. To get a clean break consent order, both couples would need to have all their pensions valued, but it would be reasonable to only share the amount of pension accrued during the 4-year marriage.
Couple B have been married for 15 years and are in their 50’s
This is a long marriage and the starting point for division of pensions would be a 50/50 split. This is irrespective of when the pension fund was accrued. Of course a 50/50 split may not be fair as part of the overall agreement. Many factors come into play, such as the age of the people, whether both parties are earning and how much they earn. If the financial settlement is being based on need (as most cases are) then, if there is a need the pensions accrued before divorce will not be automatically ring-fenced as a non-marital asset. This is an important and recent shift in way the law is applied, following the PAG and W v H (divorce financial remedies)  EWFC B10
Couple C have been married for only two years, but were living together for 20 years immediately before.
Whilst only a short two-year marriage, the total period of the relationship makes it a long one. If they lived together before the marriage and seamlessly carried on doing so after marriage, the full period of cohabitation is taken into account. In this example, the relationship lasted 22 years so it would be a very difficult argument to make that only 2 years of pension contributions should be considered. In this case the full pension value(s) should be disclosed and shared according to their needs.
Couple D have been living together for 12 years and have 2 children together. They are not married. As this couple are not married and have never been married to each other, under family law, the pensions are not counted as a joint asset and cannot be shared. They can of course agree any fair arrangement on their jointly held assets, such as a property.
We are keeping our pensions. Why do we need to disclose them?
You need to disclose pension values in order to get a legally binding financial consent order that cannot be later challenged. You don’t have to share your pensions on divorce. But the overall agreement must be fair.
Do I need to disclose old pension funds from before the marriage?
Yes. These need to be valued as well for a full disclosure to make your consent order legally binding. You will be signing a legal document to say you have included every asset in your disclosure.
How is a pension valued on divorce?
Pension valuations are dependent on whether the pension is in payment or not. If you are not yet receiving the pension, you should start by asking for a cash equivalent value (can be called CEV, CETV, CE or transfer value) from your pension provider. You are entitled to one free valuation in a 12 month period.
The pension provider has up to 3 months to send you this figure once requested.
In some cases, such as a final salary pension, the cash equivalent figure may not reflect the true value of the pension fund. To get an exact valuation of such pensions, you can get an actuary or Pension On Divorce Expert (PODE) to have them valued but this will cost money – usually between £1,500 and £5,000 depending upon the complexity of the pensions.
This is because a £250,000 pension in, say, a government funded final salary scheme may well pay out more on retirement than a £250,000 pension you have saved up in a defined benefit scheme through your private employer. Even though the balances look the same, the amount paid in retirement could differ substantially.
Do we have to get an actuary to value a pension?
No. But if the matter is contested it is likely the court will want to have such valuations to make a decision. It is important you know the option is there and can weigh up the cost and benefit of doing so for your own situation. You can make a joint instruction for an actuary to value all the pension funds and this will be less expensive than separate instructions. You may need a lawyer or solicitor to instruct them on your behalf.
Is the state pension shared?
No. For most people a state pension is not counted as an asset of the marriage. If you paid into an additional state pension and retired before 6th April 2016, you may be able to share the additional state pension element. But for most people, the state pension is not an asset and is therefore not included in your financial disclosure.
What about Missed NI Contributions?
If you go to this web page: https://www.gov.uk/check-state-pension – you will be able to see your state pension entitlement. Also, you should be able to see if you can ‘buy-back’ any missed years. Buying-back missed years may help with pension parity in retirement. This may be fair if, due to the decisions taken during a marriage, one of you missed out on paying NI – for example you took time off to raise the children. It is worth checking to help you both reach a fair agreement.
Are there other types of pensions to consider?
Yes. There are various other, less common pension types including:
SSAS (Small Self-Administered Schemes) Usually set up by company directors or business owners. They have more options than a standard scheme and can be shared.
Pension Annuities – These pay out a guaranteed amount that you have purchased with a lump sum. They can be shared on divorce.
Overseas Pensions – laws will vary depending on the country. But they still need to be valued. A British court will not have jurisdiction to share an overseas pension but the value will be taken into account on the overall split of assets.
For any unusual type of pension, you should both take independent legal advice and financial advice. Remember a solicitor cannot give you advice on how best to split a pension fund or where to invest any funds being received.
What are the options to split a pension on divorce?
You would usually have three options to share a pension on divorce:
A Pension Sharing Order
This must be made as part of a financial consent order. The Pension Sharing Order will instruct the pension fund to share a % from one pension fund and send to a fund for the other party. You can only do this with a consent order as part of a divorce. The new pension pot will be independent of the old one so each party will own their own pension fund to manage as they wish.
One party agrees to keep their pension, or proportion of it, whilst the other party will keep more of the other assets. This is usually a house or other substantial savings. There is no fixed calculator on what is fair in an offset. It will depend on needs and other section 25 factors, including ages of the parties. But there is a general recognition that a pound now is worth more than a pound in a pension pot that cannot be accessed for many years. Also remember that the case equivalent might not reflect the true value of the pension, especially if it is a final salary or government scheme pension. The PAG found that many people prefer off-setting as an option, but many of the agreements were not fair. They advised that an actuary or PODE should be used to calculate what is a fair off-set arrangement.
It is also important to think ahead to your needs in retirement. Will an offset allow for you future needs to be met? If you wish to have a definitive answer on what would be a fair offset, then you would need to instruct an actuary of PODE to provide that answer for your specific situation.
This is where an agreed % of future pension payments are made to your ex-spouse when you retire. You keep the full pension fund. These are rarely used, as they cannot continue if your ex re-marries, and the pension fund ceases on your death. They do not allow a clean break financially either, which most people are keen to achieve.
We’ve agreed to a pension sharing order. How do we do this?
You have a few options on a pension sharing order;
- Equality of income in retirement
- Equality of split based on expert value
- Percentage split of pensions using cash equivalents
Let’s have a look at each of these options below:
Equality of income in retirement.
This type of split would usually take an actuary or PODE to work out the fair division to equalise income in retirement. It is used more when you are over 40 years of age and therefore closer to retirement. As similar size pension funds do not necessarily pay out the same on retirement, it may be the fairest way to divide up pensions.
Equality of split based on expert value.
This is where you wish to equalise your pension based on the capital value now. A £400,000 NHS pension may not be equal in value to a £400,000 NEST pension. A PODE or Actuary will be able to work out the true valuations of each pension and work out a fair split of the pension funds.
Percentage split of pensions using cash equivalents (capital value)
Where the pension pots are relatively small or straightforward, you may agree to just use the cash equivalents to work out a fair division of assets. Take a look at the example below:
|Pension Cash Equivalent||Client 1||Client 2|
|% Pension Share||
65% of Barclays pension
In the above example, Client 1 should take independent financial advice on which fund would be best to transfer the % across to a new pension fund for client 2. In this example, we used 65% of the Barclays pension to allow an equality of capital value / cash equivalents. Client 2 should also take independent financial advice on the best fund to put the £65,000 into that they will be receiving.
What are the timescales for a pension share?
A pension share can only be done on divorce, once your final divorce order (or decree absolute under the old law) has been pronounced by the court. The consent order will have a pension sharing annex that will order the pension company to make the transfer. They have 4 months to do so and will base the figure on the value of the pension fund at the time of the final divorce order or decree absolute. Not at the date of separation, date of financial disclosure or date of agreement being reached.
This is important as in the above example, the order will state that 65% of Client 1’s Barclays pension pot will be transferred to a new pension pot for client 2. If Client 1 has continued to pay into the fund, they will still transfer 65% as ordered by the court. It is therefore important to make sure your consent order figures are as up to date as possible and the agreement reflected is still fair when you process the divorce. In some cases, the % split could have been agreed over a year prior to it being actioned. Remember pension fund values can change quite significantly and are very much linked to the world economy and stock exchanges.
What are costs involved?
- To share a pension you will need to have a consent order. There are different option to get a consent order and ultimate guide takes you through these and the likely costs involved. Most consent orders with a pension sharing annex will cost upwards of £1,000 plus VAT for the full process for each of you.
- You may also need to take independent legal advice and financial advice, where you should expect to pay a few hundred pounds to a few thousand pounds dependent on the level of service required.
- Most pension companies will charge to transfer a pension fund and you should agree between you how this cost will be paid.
- Finally if you are using a PODE or actuary to value pensions, you should allow a few thousand pounds for these services.
What about if my pension is in payment?
If a pension is in payment, the pension provider does not have to give you a free valuation. Instead they can charge you to value the pension pot. This can range from a few hundred pounds to a few thousand – especially if you have several pensions in payment between you. Every case is different but at Mediate UK we recommend clients ask for a Cash Equivalent (previously called a cash equivalent balance of CEB) from their pension provider. If they will give you the figure for free or at low cost, then great. If not, then hold off until it can be discussed further between you in your mediation on how best to proceed. You should obtain the estimate of cost in writing and bring this into mediation.
A pension in payment is still treated as an asset of the marriage. It is also recorded separately in your income.
What about taking a lump sum?
Sometimes the ability to take a tax-free lump sum from your pension when you are 55 years or older, opens more options on the housing arrangements as part of your divorce and can be helpful to help moving on. You should always take financial advice before deciding to do this.
Once you reach the age of 55, HMRC usually allows you to take 25% of your total pension pot as a lump lump sum. You should seek financial advice prior to doing this.
Alternatively, if a lump sum has already been taken by your ex, it depends on what has subsequently happened to it. If it has been invested into a different investment, such as a property or shares in a business, then this will be disclosed as part of the overall financial disclosure and is treated as an asset of the marriage. If the money has already been spent, unless a deliberate attempt to conceal funds, then it is not an asset anymore and it cannot be taken into account.
We just want a pension sharing order. Do we have to disclose everything else?
Yes. This is because you can only share a pension on divorce with a financial consent order. And to get a consent order you have to do a financial disclosure. The minimum information you need is recorded on a Form D81 which can be downloaded here.
I am receiving money from my ex’s pension fund. What do I need to do?
Some pension funds will create a new fund for you within the existing pension pot. You still control it and it is in your name, but the fund has been split out for you. In most cases you will need to transfer the money into a new or existing pension fund. You can set this up yourself, but we strongly recommend taking good financial advice on this. For a small outlay now, it can impact your standard of living in retirement substantially and save you tens of thousands in the long term. It is a good time to have a bit of a financial overview and sometimes combining pensions funds can work out better for you. Remember you don’t need to be a millionaire to get good financial planning advice. Mediate UK have worked with Westminster Wealth for over 12 years and they have helped hundreds of our clients.
Commonly asked questions about Pension and Divorce
Can my ex take my half my pension in a divorce?
Yes. Depending on need and the overall financial settlement, they can in theory claim up to 100% of your private pensions and the court has the power to order any transfer of assets they feel is fair.
Do we need to get our cash equivalents before mediation starts?
You can start financial mediation without your cash equivalents but, ideally, you will have all the financial disclosure completed beforehand. If you haven’t done so already, both of you should ask all your pension providers for a cash equivalent value (e.g. CEV, CETV, CE, transfer value). If you reach agreement on everything, without having your pensions valued, the cash equivalents can completely change the fairness of the agreement reached. You will need to have the figure by the time your documents go to the solicitor for your consent order to be drafted. Our advice is to request the figure as soon as possible.
Do speak to your mediator if you have any concerns about this.
I don’t want to touch my ex’s pension. Will the court agree with that?
Possibly and if the overall financial settlement is fair. In the worst-case scenario, the judge may ask questions on your order and then ask you both to attend court to confirm what you are trying to achieve from it. Your mediator can guide you on what the courts do and do not consider fair.
We have agreed to not touch each other’s pensions. Why do we need to get them valued?
Because you need to disclose all your assets to get a clean break financial consent order. And without a consent order, either of you could change your mind at any point in the future. If your ex’s financial circumstances were to change for the worse, they could still make a claim on your pension, even many years after you divorce is finalised.
Also, a court must ensure your financial settlement is fair. How can the court make that judgement if the pensions have not been valued?
Can my ex claim on my pension after we are divorce?
Yes. Without a clean break consent order they can do so, even many years in the future.
We’ve been living together as common law husband and wife for many years. Can I claim on their pension?
No. Under UK law, there is no such thing as common law husband and wife. Only joint financial assets can be shared, such as a property or business that you both own.
We are married under Sharia Law in the UK. Can I make a claim on ex’s pension?
There has been recent case law to show that a marriage under Sharia Law is not recognised as a marriage under UK law and as such you cannot make a claim on any assets that are not shared. This would include your ex’s pension fund. There was a case at the High Court Mr Khan vs Mrs Akhtar which confirmed this ruling. There is more on this here.
I disagree that my pension should be shared. I worked hard for it after all.
You don’t have to share your pension on divorce. But the law says it will be counted as an asset, even the relatively small amount accrued during a short marriage. It would be a very difficult argument to take to court to say you don’t believe a pension should be counted as an asset. Instead, you could look to offset it against other assets.
You can also get divorced without sorting out the finances, but without a clean break consent order, either party could make a claim against the other’s assets – including their pension – even many years after the divorce took place. If you do not agree between you, you can try family mediation to help you both reach an amicable and fair settlement.
We have been separated for many years. Why can’t we use the value of the pension when we separated?
This is because the court need the current values of all your assets. You will need this to get a legally binding consent order. The bottom line is, if you are still married and do not have a legally binding consent order, then the other party has a legal claim on your finances, irrespective of when you separated.
My ex says if I touch their pension, they won’t agree to anything else.
The court need to agree that your agreement is fair. If they don’t, they will not seal it (make it legally binding) and neither of you will be financially protected from having a consent order. A pension is always counted as an asset. It is then up to you both to agree what should happen with it.
We can’t agree on the pension or other finances. What can we do?
You have 11 options to resolve a dispute on finances as part of a divorce or separation. If you cannot agree between yourselves, the next logical step is to try family mediation. You can find out more about the financial mediation process here. But the mediator will work with you both to agree your financial disclosures and then agree how they will be fairly divided up, including any pensions.
We don’t want to divorce now. Can we still sort our pensions out?
You can agree the financial settlement now and invite the court to accept when you later get divorced. This is called a separation agreement. They are not 100% watertight legally as, if circumstances change significantly, the court still has a duty to consider need at the time of divorce. Whilst you can agree how the pensions will be split when you later get divorced, you cannot physically share a pension fund until the divorce is finalised. Also bear in mind that if you continue paying into a pension fund, you will need to revisit the percentage split of that fund at the time of the divorce, as the value of the pension pot is likely to have increased and the figure used to value it in disclosure will be at the time of the divorce, not separation.
We already know how we want to share our assets including our pensions. Cant you help with that?
You have three options usually to get a consent order as part of your divorce, or after if already divorced. Mediate UK can help you reach an agreement, but if you already have one between you we can help you sense check, draft all the paperwork required and make it legally binding through one amicable solicitor. See our facilitation packages for more information on this.
It’s all a bit confusing! Where can I get further information?
You can also book a consultation with our Business Support.
In their report, Age UK found that 71% of divorcing couples do not even discuss their pensions. But they are a very important part of your financial future. To get a legally binding order to protect you both, you must disclose the value of all pensions. Mediate UK will work with you both to discuss all the options and allow you then to make the best, informed decisions. We can even help you with independent financial advice and fixed fee legal advice as part of your mediation process.
Pensions can often be the biggest asset and many people are surprised at the values. They are an important part of most financial settlements, and your mediator can work with you to reach a fair agreement. We can then make this legally binding for you at a fixed fee – including any pension sharing annex.
Mediate UK are a multi award-winning family mediation service. Wecan help with fixed fee mediated and consent order packages (when you don’t have an agreement between you) or fixed fee facilitation and consent order packages (when you have an agreement in principal) – and our legal paperwork is always drafted by our highly experienced family law solicitors.