How a divorce affects your pension and savings: the factors to consider, and your rights explained

The number of couples seeking a divorce spikes at the beginning of January. In fact, the first Monday of the year is dubbed “Divorce Day” by lawyers, thanks to a surge in enquiries from unhappy couples after Christmas.

The Divorce, Dissolution and Separation Bill was announced in the Queen’s speech last autumn.

Helena Morrissey, long term savings spokesperson for pension provider Royal London points out that while this could be good news in terms of ensuring people separate more amicably, it also means important financial considerations may not be thought through properly.

She says: “This means issues such as what happens to the pension are not considered properly and women could find themselves in financial difficulties further down the line.”

Zoe Bailey, director of financial Planning at Tilney, says that with women living longer than men, it is up to couples to make sure all pension assets were totted up during a split. “For some couples, their pension fund could be worth more than the family home.”

Pensions only have to be split if you are married or in a civil partnership. If you are cohabiting any agreement to split a pension will have to be a mutual one or part of a court settlement.

Laura Laidlaw, head of customer communications at Standard Life, says there are three things all couples must consider when splitting the money invested into their pensions.

“Always get your pension valued in the marital balance sheet when you’re discussing separation. But remember, only the person who is a member of the pension scheme, or who has taken out the pension, can ask for this,” she says.

It is particularly important that those with a DB pension, so-called final salary scheme (defined benefit) recognise how valuable this important financial asset is and make plans for how it will be split.

“The value of this is based on how many years you’ve worked, and the salary you earned – so it’s something many feel precious about,” she adds.

Most pensions have a free annual statement, which can give you an idea of how much it is worth but any valuations will have to be paid for. You can also expect to pay some charges if you transfer money out one pension into another.

When you get the value it may be called the “cash equivalent transfer value”. This is the amount you would get if you took out your pension and moved it to another pension scheme.

Throughout the UK, and in Scotland, your pension must be valued on the date of separation, and only the value that has built up during your marriage or civil partnership is taken into account so you will need to find out how much of the pension was built up during your marriage.

There are three main options of how to deal with pensions in a divorce.

Offsetting, which is when the value of any pensions is weighed up against other assets. In this case, each party keeps their own pension, but they’re included in the marital asset balance sheet with other items of value shared appropriately. While this option provides a clean break, it can run the risk of leaving one party with a pension and nothing else.

Sharing, which is when some of the pension is transferred to the other person to give them their own pension pot.

The final option is earmarking, where a partner keeps their pension savings, but agrees to pay a portion of their retirement income to their ex-partner from the date they start to take it.

Laura says: “If you’re earmarked to receive some of your ex-partner’s pension you will not receive anything until they begin to take an income from their pension. There’s also a lack of security because it’s your ex-partner’s pension and the income will stop when they die.

“If you remarry or die before your ex-partner does, the full pension reverts to them – your family won’t receive anything.

“Consequently, earmarking isn’t as popular as it once was.”

Different options for dividing pensions have different tax implications. If you’re trading-off a tax-free asset to get taxable pension rights, the tax hit must be reflected in the split of assets.

Remember, if you’re thinking about getting divorced and you’re confused about what this might mean for your pension, speak to your pension provider to understand what is best for you.

Alternatively, The Pensions Advisory Service (TPAS) has a free service to help you understand your options and make informed decisions.

Hannah gave up a senior career in advertising to help set up The Talented Ladies Club, an online networking and support group.

“When I got divorced I wanted to keep it amicable, to avoid the expense of lawyers. I have seen divorces escalate once couples involve lawyers – with costs eating into their hard-earned assets.

“So I researched DIY divorces. I learned that you could download the papers and submit to the court yourself (current court fees are £550). There’s no need to go via a third party website – you apply online through the government website (gov.uk/divorce/file-for-divorce). The process was easy and quick. My husband was in agreement and I submitted the forms, which he signed. So within four months I had my precious decree absolute.

“I did have a pension but we agreed not to split it. Our divorce was a clean break one.

“It’s not always easy to extricate yourself from a marriage in which your finances and possessions have become entwined over many years. But the simpler and less vengeful you keep your divorce, the lower your fees will be and the more money and property you’ll have left to share.”