Pension Sharing and Divorce Settlements: How It Works and What to Expect

For many couples, pensions are among the largest assets accumulated during a marriage, sometimes even exceeding the value of the family home. Understanding how pensions are treated in divorce settlements is therefore an important part of protecting your long-term financial security.

This guide explains how pension sharing on divorce works, how pensions are valued during divorce, and what it may mean for retirement planning.

Pension sharing on divorce is a legal method for dividing a pension between two people when a marriage or civil partnership ends. This is carried out through a pension sharing order issued by the court.

A pension sharing order instructs the pension provider to transfer a specified percentage of one person’s pension to their former spouse or civil partner. This transferred portion becomes a separate pension arrangement in the receiving partner’s name.

Once a pension-sharing order after divorce is approved by the court, the pension provider must implement it. The process usually involves:

1. The court specifying the percentage of the pension to be shared

2. The pension provider calculating the value of the share

3. A new pension account being created for the receiving spouse

4. The transferred pension becoming the recipient’s independent asset

This means each person will have their own pension arrangements going forward. The receiving spouse can usually transfer the new pension to another scheme or keep it with the existing provider, depending on the scheme’s rules.

Implementing a pension sharing order after divorce can involve administrative costs charged by the pension provider. These fees may cover the cost of calculating the transfer value and creating a new pension arrangement.

Who pays pension sharing order fees for divorce varies depending on the divorce settlement. In some cases, the fees are shared between both parties. In others, the cost may be deducted from the pension, with the remainder divided or assigned to one spouse as part of the financial agreement.

Because fees and administrative processes vary between pension providers, it is important to understand how the scheme involved handles pension sharing orders.

When a couple divorces, all marital assets are usually considered as part of the financial settlement. This can include property, savings, investments and pensions. While pensions are sometimes overlooked during divorce negotiations, they can represent a substantial portion of the overall finances.

Courts in England and Wales aim to achieve a fair division of assets between both parties. This does not always mean a 50/50 split, but it does mean pensions are typically considered when determining how assets should be divided.

Several types of pensions may be considered during divorce proceedings, including:

• Workplace pensions

• Personal pensions

• Self-invested personal pensions (SIPPs)

• Defined benefit (final salary) pensions

• Defined contribution pensions

The court may consider both pensions accumulated during the marriage and, in some cases, pension benefits built up before the relationship began. The approach taken depends on individual circumstances, including the length of the marriage, each partner’s financial needs and their expected retirement position.

Because pension benefits are often long-term assets, decisions made during divorce can have lasting consequences for retirement income. This is why pensions are increasingly recognised as an important part of divorce settlements.

While pension sharing is one of the most common approaches used today, it is not the only way pensions can be considered in divorce settlements. Courts may also consider alternative methods depending on the circumstances.

Pension Offsetting

Pension offsetting involves balancing the value of a pension against other assets in the divorce settlement. For example, one spouse may keep their pension while the other receives a larger share of the property or savings. This approach avoids splitting the pension itself, but it requires careful valuation of all assets to ensure the settlement is fair.

Pension Attachment

Pension attachment orders, sometimes referred to as ‘earmarking’, direct a portion of future pension income to a former spouse when the pension holder begins drawing benefits. Under this arrangement, payments are linked to the pension holder’s retirement decisions. Unlike pension sharing, the recipient does not receive an independent pension, and payments may stop if the pension holder dies.

When pensions are considered in divorce proceedings, it is important to understand their value. The most common measure used is the Cash Equivalent Transfer Value (CETV). A CETV represents the estimated lump sum value of a pension if it were transferred to another scheme. Pension providers can issue a CETV statement showing the current estimated value of the pension.

Several factors may influence how pensions are valued during divorce proceedings, including:

• The type of pension scheme

• The age of the pension holder

• Contributions made during the marriage

• Expected retirement income

• Inflation assumptions and life expectancy

Defined contribution pensions are usually easier to value because the pension pot has a clear market value. Defined benefit pensions can be more complex because their value is based on future income rather than a fixed pot of money.

For this reason, specialist actuarial advice is sometimes used in larger or more complex divorce settlements.

The percentage awarded through a pension sharing order is determined by the court as part of the financial settlement. This percentage reflects what the court considers a fair division of assets. The calculation may consider:

• The length of the marriage

• Each spouse’s earning potential

• The need to provide retirement income for both parties

• Other assets included in the settlement

In many cases, the goal is to achieve a balanced financial outcome that considers both immediate needs and long-term retirement security.

The State Pension is treated differently from private pensions during divorce proceedings. The basic State Pension and the new State Pension generally cannot be shared directly through a pension sharing order.

However, the State Pension may still influence the overall financial settlement. In some cases, entitlement built up during the marriage may affect how other assets are divided.

Under certain circumstances, divorcees may also be able to benefit from their former spouse’s National Insurance contributions under older State Pension rules.

Because the rules around State Pension and divorce can be complex, it may be beneficial to review your National Insurance record and pension forecasts to understand how they apply to your situation.

Divorce can significantly alter retirement plans, particularly when pensions are divided between partners. A pension sharing order after divorce may reduce the value of the original pension holder’s retirement savings while providing the other spouse with a new pension arrangement.

For both individuals, this may mean reassessing retirement expectations and financial plans. Some of the potential effects include:

• Changes to expected retirement income

• The need to increase pension contributions

• Adjustments to retirement age or lifestyle expectations

• Reconsideration of investment strategy

Rebuilding retirement savings after divorce may take time, particularly if the separation occurs later in life. However, reviewing pension arrangements early can help you make informed decisions about future contributions and investment choices.

Understanding how pension sharing affects retirement planning can also help ensure both parties maintain financial independence in later life.

Pensions are often among the most complex assets involved in divorce settlements. Understanding how pension sharing orders work and how pensions are valued can be challenging without professional guidance.

You may wish to seek professional advice if:

• A significant portion of your assets is held in pensions

• You are unsure how pension sharing will affect your retirement income

• You need help interpreting pension valuations

• You want to understand the long-term implications of a divorce settlement

Financial advisers and pension specialists can help explain how pension sharing on divorce may affect your long-term financial position. Legal professionals and financial experts often work together during divorce proceedings to ensure pension arrangements are understood and handled correctly.

Seeking professional advice can help ensure decisions made during divorce settlements support both short-term financial needs and long-term retirement security.

This content is for general information only and does not constitute legal or financial advice. Pension sharing on divorce is complex and depends on individual circumstances. You should seek advice from a qualified solicitor or financial adviser before making decisions, as pension legislation can change.