Pension sharing explained

Why pensions matter in divorce

Pensions are often substantial assets – sometimes worth more than the family home. Yet many people either forget about them or don’t realise they can be shared.

If you’ve been married for many years, your spouse may have built up a significant pension while you focused on raising children or supporting their career. Without addressing pensions in your settlement, you could miss out on retirement security you’re entitled to.

All pension rights built up during the marriage are usually considered matrimonial assets, regardless of whose name they’re in.

Getting pension valuations

Before you can negotiate, you need to know what pensions are worth. Each pension scheme provides a Cash Equivalent Transfer Value (CETV) – the amount it would cost to provide the same benefits elsewhere.

How to request a CETV

Contact each pension scheme and request a CETV for divorce purposes. You’re entitled to one free valuation per year. Pension schemes must provide the valuation within three months.

The CETV is valid for one year in court proceedings, though values can fluctuate with market conditions.

What to request

For each pension, you need:

• Cash Equivalent Transfer Value (CETV)
• Pension scheme details and reference numbers
• Whether the scheme accepts pension sharing orders
• Any charges for implementing a sharing order

CETV limitations

CETVs are useful for comparison but have limitations:

Defined contribution pensions – the CETV is simply the fund value. Straightforward.

Defined benefit pensions (final salary schemes) – the CETV is an actuarial calculation that may understate the true value of guaranteed benefits. A £200,000 CETV in a final salary scheme may provide far more retirement income than £200,000 in a defined contribution pot.

For significant defined benefit pensions, consider instructing a Pension on Divorce Expert (PODE) to analyse the true value.

Three ways to deal with pensions

Pension sharing order

A pension sharing order splits the pension at the point of divorce. A percentage of one person’s pension is transferred to the other, creating their own independent pension rights.

How it works:

1. The court makes a pension sharing order specifying a percentage
2. The pension scheme receives the order
3. Within 4 months, they implement the split
4. The receiving person gets a “pension credit” – either in the same scheme or transferred to their own pension

Advantages:

• Creates a clean break – your pension becomes yours alone
• Each person controls their own retirement planning
• No ongoing link between the parties
• Adjustable percentages can achieve fair division

Disadvantages:

• Receiving person takes on investment risk
• Can’t undo if circumstances change
• Implementation charges apply (typically £500-£2,000 per scheme)
• Only available on divorce, not separation

Pension offsetting

Instead of splitting the pension, you offset its value against other assets. The pension holder keeps their entire pension, but the other person receives more of other assets (like property or savings) to compensate.

Example: Husband has a pension worth £200,000. Wife receives £100,000 more of the house equity instead of sharing the pension.

Advantages:

• Simpler to implement
• No pension scheme charges
• Useful when one person wants to keep their pension intact

Disadvantages:

• Compares different asset types (pension vs cash/property)
• Pension values can be misleading (especially defined benefit schemes)
• Receiving person may undervalue pension benefits
• Not a true like-for-like exchange

Pension attachment (earmarking)

A pension attachment order requires the pension holder to pay part of their pension income (or lump sum) to their ex-spouse when they retire.

Advantages:

• Straightforward to understand
• No immediate implementation

Disadvantages:

• No clean break – ongoing financial link
• Depends on when the pension holder retires
• Ends if the receiving person remarries
• Ends when the pension holder dies
• Receiving person has no control over when benefits start

Pension attachment is now rare because of its disadvantages compared to pension sharing.

Calculating fair division

A 50/50 split of pension CETVs doesn’t always achieve equality of outcome. This is because:

• Defined benefit pensions may be worth more than their CETV suggests
• Different schemes have different retirement ages
• Tax treatment varies
• One person may have more years to retirement than the other

Achieving equality

There are different approaches:

Equality of capital – split CETVs 50/50. Simple but may not result in equal retirement income.

Equality of income – calculate what percentage split would give both parties similar retirement income. Often requires expert analysis.

Needs-based – divide pensions to meet each person’s retirement needs, which may not be equal.

For significant pension wealth, professional analysis from a PODE (Pension on Divorce Expert) can help determine what’s truly fair.

The pension sharing process

Once you’ve agreed terms:

In your consent order

The pension sharing order must be included in your court-approved consent order. It should specify:

• The pension scheme details
• The percentage to be shared (not a fixed amount)
• Whether the pension credit will stay in the scheme or be transferred out

Implementation

After the consent order is approved and you have your final divorce order:

1. Send the pension sharing order to the pension scheme (they may have specific forms)
2. The scheme verifies the order is valid
3. Within 4 months, they implement the split
4. The receiving person receives their pension credit

Where does the pension credit go?

The receiving person can usually either:

• Keep the credit in the same pension scheme (internal transfer)
• Transfer it to their own pension (external transfer)

Each option has pros and cons. Internal transfers may retain valuable scheme benefits, while external transfers give complete independence. The pension scheme will explain the options.

Common mistakes

Forgetting pensions exist

Especially with old workplace pensions from previous jobs. Both parties should trace all pension entitlements.

Using CETV as the only measure

For defined benefit schemes, the CETV may significantly understate the value of guaranteed income. Get expert advice for large pensions.

Not considering tax

Pension withdrawals are taxed as income. A £100,000 pension pot doesn’t mean £100,000 in your pocket.

Offsetting without proper valuation

Taking property instead of pension share without understanding the true pension value can lead to unfair outcomes.

Leaving pensions too late

Pension valuations take time to obtain. Start requesting CETVs early in the divorce process.

Getting help

For straightforward cases with defined contribution pensions of modest value, you may be able to agree pension arrangements yourselves with basic legal advice.

For complex situations, consider:

Family solicitor – can advise on pension sharing as part of your overall settlement and draft the necessary orders.

Pension on Divorce Expert (PODE) – an actuary or financial adviser who specialises in valuing pensions for divorce. Essential for large defined benefit schemes.

Independent Financial Adviser – can help with decisions about where to invest your pension credit.