Divorce and pensions: the overlooked asset that could shape your future
Last month, we explained the idea of a “clean break” in divorce. This month, let’s turn to something just as important: pensions. For many couples, pensions are the second largest asset after the family home. Yet they’re frequently underestimated, sometimes even forgotten, in financial settlements.
Why pensions matter
Pensions aren’t just about retirement income; they’re long-term financial security. When couples divorce, these funds can be substantial and need careful thought. Ignoring them could mean one partner walks away with significantly less financial stability.
Different types of pension
Often several pensions will have been accumulated – for example someone may have been in service (military, NHS or civil service) or had several different employers all with different pension schemes or have been self-employed and arranged their own pension. All will have different benefits that will need to be valued and assessed.
Pension benefits fall into different categories, normally money purchase pensions or defined benefit pensions. In the case of money purchase pensions, the capital value is usually the monetary value of the fund but for defined benefit pensions, the capital value will need to be calculated. Valuations often take months for the pension company to provide.
How pensions can be divided
Once all assets (including pensions) are valued, there are different ways to deal with them:
Pension sharing: a percentage of one person’s pension is transferred to the other, creating two independent pots.
Offsetting: one party keeps more of the pension, while the other takes a larger share of another asset (often the family home).
Pension attachment orders: the court directs some pension benefits to the ex-spouse, but for several reasons, these orders are rare today.
Which route is best will depend on many factors including age, earning capacity, living arrangements, stability for any children, long-term financial planning, taxation and, of course, the needs of the parties and the value of all the assets in the martial pot.
