January 8 is regarded by many as “Divorce Day” because the number of people seeking to end their marriage hits a peak.

A pension could be a couple’s most valuable matrimonial asset, in some cases worth more than the equity in the family home. As such, it is important that pensions are considered in the financial settlement if a couple decides to divorce or dissolve their registered civil partnership. All the money you’ve paid into it (except for your basic State Pension) will be taken into account when your assets are divided.

The importance of taking pensions into account

Pensions vary in complexity. Some are relatively straightforward whilst others, in particular public sector or other final salary schemes, can be much more complicated. When a marriage breaks down, a couple might not appreciate the importance of taking pensions into account as a key asset – and perhaps even the most valuable asset – on divorce. It may be that you’re a long way from retirement, and how you’re going to manage then may not seem the most pressing issue. However, it’s important not to underestimate or overlook pensions and to consider how this could eventually impact on your retirement.

The courts have long had the power to take pensions into account in dividing up the matrimonial assets. Over the years, you may have paid into a number of workplace and personal pension schemes, as well as the additional State Pension. You’ll need to obtain a valuation for each scheme. This will be based on what your pension would be worth if you moved it elsewhere. Typically, the total will be below the current fund value because any charges or penalties for transferring out of the scheme will be included. If you live in England, Northern Ireland or Wales, you will need to obtain a statement that gives you the cash equivalent transfer value. If you live in Scotland, your pension value will be based on what was paid in after you married or entered into a civil partnership, up to the date of separation.

The division of assets

Once you’ve obtained the value of all your pensions, you need to think about how you will divide them between you. It is important to realise that there is no automatic entitlement to pension sharing. People often seem to think that just because they have been married, they are entitled to half of everything – including the pension. That is not the case. Divorce pension entitlement is more subtle than that. When disputes arise within families, emotions run high and rash decisions can be made. This is why divorce is an arena fraught with acrimony.

But seven in ten couples don’t consider pensions during divorce proceedings, leaving some women short changed by £5 billion every year [1]. Research shows that more than half of married people (56%) would fight for a fair share of any jointly owned property, and 36% would want to split their combined savings.

What happens to pensions when a couple divorce?

Few couples know what happens to pensions on divorced, which may explain why so few couples consider them as part of a settlement. A fifth (22%) presume each partner keeps their own pension, and 15% believe they are split 50/50, no matter what the circumstances. In reality, pensions can be dealt with in a number of ways on divorce.

  1. Pension sharing Divorce courts can, and often do, order a pension to be shared when considering financial arrangements during a divorce. Other options however include offsetting which is where the pension fund value is ‘offset’ against other matrimonial assets, such as the house. The offsetting of a pension or part of a pension against another capital asset has to be done carefully because of the different nature of capital assets and pensions. Pensions are not liquid assets; they can only be turned into cash at retirement.When a pension is divided or shared, this does not mean that you will receive a cash lump sum – although in certain circumstances where the recipient is over retirement age that can be the case. A pension or part of a pension that is ordered from one party to another still remains a pension and has to be invested in a pension plan.
  2. Pension offsetting The value of the pension is weighed against another asset, such as the family home. If you choose this option, your ex could be awarded a larger share of the property in return for you keeping your pension. However, they will have to make their own retirement arrangements. If they’re close to retirement and haven’t made any pension arrangements of their own, they may not agree to offsetting.
  3. Pension earmarking Pension earmarking means that one of you receives a lump sum or income from the other person’s pension when they start to draw down on it. However, the pension holder may decide not to take their pension straight away or carry on working, leaving the other person without a retirement income. If you’re dependent on pension earmarking and you remarry, you will lose your right to carry on receiving the pension – and if your ex dies, your income is likely to stop.
  4. Deferred lump sum You receive a lump sum when the pension holder retires. This option is not available in Scotland.
  5. Deferred pension sharing If your ex is below the age at which they can receive a pension and you are already receiving one, you can ask the court to make a Deferred Pension Sharing Order. This allows you to receive an unreduced pension until they reach the age at which they can start to receive a pension too. This option is not available in Scotland. If you’re retired, you can still split pensions if your ex has already retired, but it won’t be possible for a tax-free lump sum to be taken from their pension – even if they took a lump sum.

Obtaining the right legal and financial guidance and support is vital when dealing with pensions (and indeed the other assets and financial issues) in the event of a divorce. Pensions may vary in complexity and can be confusing at the best of times; the details need to be addressed carefully.