Managing your pensions after a divorce


Did you know the first Monday back to work after the festive period is known as Divorce Day? It’s when solicitors see a spike in the number of couples that are considering breaking up.

This year it fell on January 6, with legal experts fielding more enquiries than usual from unhappy couples. It’s normal to feel pressure over the Christmas period and the New Year may spur some people on to make big decisions about their relationships. According to charity relate, 44% of adults row with loved ones during the festive period. As a result, it’s not surprising that some couples start 2020 by considering life apart.

Going through a divorce is challenging and there are many different areas to think about. Whilst we know that assets are split up, from property to savings, you may forget about one of your largest assets: your pension.

But pensions are more commonly becoming part of divorce proceedings. If you’re going through a divorce, it’s important to understand how pensions could be shared and what it means for your retirement plans. Taking an active approach can mean you’re in a better position to achieve your retirement goals.

3 ways pensions can be split during a divorce

When going through the divorce process, your solicitors should assess the gap between your pension and that of your partner’s. Where there’s a gap, pensions may be split. There are three ways this can be done, each with pros and cons.

1. Pension sharing: For a couple divorcing in 2020, a pension sharing order will be the most commonly used option. With this option, the partner with no pension or a lower pension value will be awarded part of their ex’s pension, known as a pension credit. The pension credit can then be transferred to either an existing or new pension in their own name. It allows couples to make a clean break financially and both to be in control of their financial future. The number of pension sharing orders has increased by 40% between 2015 and 2018.

2. Pension earmarking: Pension earmarking orders, also known as pension attachment orders, aren’t as popular as pension sharing, but they are on the rise. Between 2015 and 2018 the number of pension earmarking orders issued increased by 60%. Pension earmarking gives one party a portion of the other’s pension. This becomes available when the pension holder starts to draw retirement benefits. If you live in Scotland, the receiving party can only receive a lump sum when the pension is first accessed. However, in England, Wales and Northern Ireland, they may also choose to receive an income on an ongoing basis. The amount awarded can either be a defined lump sum or a percentage of the pension. With this option, your finances would remain tied to your former partner and their decisions could affect your plans.

3. Pension offsetting: An alternative to both the above is pension offsetting, this would leave both parties with their current pensions intact. However, the party with the lower pension value would receive a larger portion of other assets in return for giving up their entitlement to the pension. So, for example, they may receive a bigger share of property wealth or other assets. It’s an option that can provide a clean financial break.

Planning your future after divorce

Following a divorce, you’re likely to have some significant decisions to make.

Your future plans and aspirations may have changed significantly. It’s a good idea to take some time to consider what you want to achieve in the short, medium and long term. With goals set out you can make the right financial steps for you. So, what should you do after a pension has been split? There’s no one-size-fits-all solution, it’ll depend on your circumstances.

If you received a pension settlement

Being awarded a portion of your ex’s pension can help improve your financial security. However, there are still decisions that will need to be made if it’s to have the impact you’d like. What your decisions centre on will depend on which of the three options outlined above have been used:

  • With a pension sharing order, you’ll need to decide where to place the pension credit to achieve your goals, this may include looking at investment prospects and fees. In addition, it’s important to take the time to understand how the pension value may change between now and retirement, as well as the income you can expect it to deliver.
  • With pension earmarking, your finances will be more closely tied to your ex-partner’s. As a result, it’s important to understand their current pension situation and plans. Typically, you won’t receive anything from the pension until they start to access it. If their plans don’t align with yours, this could have a significant impact on your aspirations.
  • A pension offsetting order means you’ll receive a greater portion of other assets to offset the difference in pensions. This can mean you’re more financially secure in the short term, however, you should ensure you have a plan for retirement too.

If your pension has been reduced

If your pension value has been reduced following a divorce, assessing the impact should be a priority. How will it affect your retirement income? Measuring this alongside your desired lifestyle can help ensure you’re on track. In some cases, you may find that your current pension and contribution levels will still deliver the income you need. In other circumstances, you may find you need to adjust existing plans and actions to still achieve your aspirations.

Please get in touch with us if you’d like to discuss your financial future following divorce. We’re here to help you understand how your financial situation may have changed and the steps that could help you remain on track.

Please note: Investment carry risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.