Divorce and pensions: What you should consider when divorcing

When a marriage breaks down and parties divorce, it’s important not to overlook the sharing of pensions, which can often be a significant asset to the parties in the same way as equity in property or savings. 

In November 2023, a report was published following a study by the Nuffield Foundation and Bristol University, which reported that:

• 38% of divorcees felt their knowledge of their ex-spouses’ finances during the marriage was not good.
• 37% did not know the value of their own pension, and nearly a quarter (23%) did not know what kind of employer pension scheme they were enrolled in (i.e., defined benefit or defined contribution scheme).
• Only 11% of divorcees with a pension yet to be drawn had arranged for pension sharing.

Following the findings, policymakers are recommended to advise couples to take full account of all their assets and future requirements when deciding. This emphasises the need of parties exchanging complete transparency in divorce procedures so that they can seek appropriate legal and financial advice.

The courts in England and Wales have the power to make a pension sharing order; however, caselaw has sparked continuous debate on how pensions in divorce should be approached. The Pensions Advisory Group (PAG) has published two reports now, and the short answer is that there is no “one size fits all” when it comes to pensions and how these should be shared.

The first step is to ensure that the parties have obtained all relevant information about their pensions. It is also important to reflect on previous employment and consider whether there are any small pension pots that you may have forgotten about. If necessary, pension tracing services can be instructed.

After the pensions’ values are established, a report from a pension actuary is frequently required to examine the capital and income benefits of each party’s plan and provide advice on how those pensions should be structured such that benefits are shared fairly. This is usually done through joint instruction with an actuarial.  Parties may also wish to consider options for “offsetting,” i.e. one party receiving more capital in lieu of part or all of a pension claim, and the actuary can also provide guidance on this.

There can often be a delay in obtaining pension values. In recent years, there have been embargoes and pension values being provided for public sector schemes due to changes in the way they are calculated. It is therefore essential for parties to request their pension values at the earliest opportunity.

When parties divorce, there needs to be careful consideration of their capital and income needs, including future needs in retirement, to enable parties to make informed decisions regarding the division of assets. To make an informed decision, they need to be able to understand the value of a pension and the available future capital and income from it, to determine whether the proposed division of assets will allow them to live the life they want.

Ultimately, by understanding the value of pensions and considering their implications for future financial security, individuals can make informed decisions that pave the way for a smoother transition into the next chapter of their lives post-divorce.

This article was written by Associate, Alicia Baron, who works as part of Claire Withers‘ team.