When dealing with the financial implications of divorce, it is understandable that the parties’ main priority is to ensure that both they and any children of the family are suitably housed and have sufficient income to support themselves. However, pensions can be among the most valuable assets available for division and, in many cases, may be worth significantly more than the other assets being considered.
Pensions are often overlooked because their value may not be accessible until later in life (for example, private pensions can presently be accessed from age 55, rising to 57 from April 2028). However, the parties and the Court should still consider all available assets in a divorce and the future needs of the parties on retirement. Failing to take pensions into account could leave one party in a difficult long-term financial position.
In England and Wales, guidance as to how the Court and legal practitioners should deal with pensions on divorce is set out in the Pensions Advisory Group Report (second edition) dated January 2024.
In financial remedy proceedings, the Court will generally consider the total value of all pensions accumulated by the parties during their lifetimes. Pensions accrued before the marriage or after separation may also be taken into account, particularly where assets are limited, often referred to as “needs” cases, with the key aim being to ensure that both parties’ retirement needs are met.
The way pensions are dealt with on divorce will depend on the precise circumstances of each case. The Court’s overall objective is to achieve a fair outcome by applying the criteria in section 25 of the Matrimonial Causes Act 1973. The Court’s primary focus is usually is to meet the needs of the parties and any minor children. In some cases, it may be appropriate for each party to retain their own pensions if the size of their pension pots are broadly similar or are of a sufficient value to provide an adequate retirement income. However, if the Court considers it necessary to divide pension provision along with the other matrimonial assets, there are three main options:
- Offsetting
Pensions can be taken into account when dividing assets in a financial settlement. For example, one person may keep a larger pension while the other receives a greater share of the remaining assets. However, it is often necessary to obtain expert pension advice to make sure this is fair, as working out the true value of a pension can be difficult, particularly if it is a public sector or final salary pension.
- Pension Sharing Orders
This is by far the most common way of dealing with pensions on divorce. It involves a percentage of one party's pension(s) being transferred to the other party at the end of the divorce proceedings, allowing both parties to achieve a financial clean break, provided there are no ongoing maintenance obligations.
- Pension Attachment Orders (also known as earmarking)
These orders are now rarely used. They provide for an agreed share of one party’s pension to be paid to the other party when the pension comes into payment. There are important risks to consider, as the payments may be affected if the pension holder dies before retiring or remarries.
The Pensions Advisory Group advises that specialist pension advice should be obtained in a number of situations, particularly where public sector pensions or defined benefit/final salary schemes are involved, there is a significant age difference between the parties, or the pensions have a high overall value. In some cases, expert advice may still be worthwhile even if the combined value of the pensions is less than £100,000.
If you would like advice regarding pensions on divorce or any other financial issues arising from divorce, please contact a member of the Family Law Team at Roythornes, who will be able to assist you.