Pensions and divorce; how the pension can be divided and why pension freedoms could mean you lose out

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Working out how much assets such as the pension are worth may not be straightforward and new pension freedoms, introduced in 2015, mean that people who have entitlement to a ‘rinfenced’ pension from their husband or wife could lose out. Find out why.

Pensions and divorce

In England, Wales and Northern Ireland the pension(s) that your husband, wife or civil partner and you have built up may be taken into account up until the time you separate. In Scotland, only the pension that has been built up while you’ve been married can be taken into account.

How the pension can be divided

When you get divorced there are three options relating to pensions:

  • The pension can be offset against another asset. This means that the pension’s value is taken into account, but other assets (such as the family home) are ‘offset’ against it. The person who’s built up the biggest pension (often, but not always, the husband) gets to keep it intact.

Pros and cons

Pros:

It may seem like a straightforward solution. For years, offsetting was the only option for divorcing couples who wanted to divide assets that included a significant pension. Many divorce lawyers were very familiar with the concept and certainly in the past would suggest it when other options might be better.

Cons:

If one partner has built up a large pension pot, there may not be anything else as valuable to offset against it.

One partner keeps their entire pension intact (but may have difficulty in buying a property or getting a mortgage, particularly in the current climate) but the other has no pension at all.

  • The pension can have an attachment order  Here, the part of one partner’s pension is ringfenced for the other to take when they retire.

SAVVY TIP: This is the type of pension arrangement that may be affected by pension freedoms, which came into effect in April 2015 and gave people with a pension ‘pot’ type of pension the freedom to do what they wanted with their money once they reach the age of 55.

Pros:

You get a pension income when you retire.

Cons:

You have to wait until your ex retires (assuming you’re the person benefiting from the ‘earmarked’ pension) before you can take the pension.

If your ex husband dies before retirement you may not receive the pension at all.

Since the pension freedoms were introduced in 2015, you may lose your entitlement to a pension – it all depends on the wording of the attachment order or earmarking.

How you may lose out because of pension freedoms

If, for example, it’s your ex husband, wife or civil partner’s pension that’s being divided, if the pensions earmarking/attachment order only entitled you to a share of the pension income when you both retired, in theory your ex husband wife or civil partner could take all the money out of their pension (assuming it’s not a public sector final salary scheme) under the new pension freedom rules.

In that case, there wouldn’t be any income left to divide. But if the earmarking or attachment order applied to the capital as well as income, you should still be entitled to receive a share of the pension when your ex husband, wife or civil partner retires.

  • The pension can be split (or shared). This is becoming more popular but, although it sounds simple on the surface, working out what the pension is worth now and what’s a fair split can be time-consuming and costly.

Pros:

You have a pension fund or rights at the time you get divorced so you don’t have to start from scratch building up your pension.

You don’t have to wait for your ex to retire before the pension is paid.

Cons:

Valuing a pension (particularly a salary-related pension scheme) can be complicated.

You may not be allowed to join your ex husband’s pension scheme so you’d have to work out what type of pension to take out instead.

SAVVY TIP: These ‘cons’ shouldn’t stop you from going down the route of dividing the pension at the time of divorce. It’s just worth being aware of the fact that you may have to pay for a pensions expert and/or financial adviser who understands divorce (there are some who have taken specialist exams) to help demonstrate what you’d be entitled to under a fair split.

Taking money from a pension under pension freedoms

If you’re thinking of getting divorced and your husband, wife or civil partner has a substantially bigger pension than you, be aware that, if he or she has a pension ‘pot’ type of pension (rather than a final salary one), your partner could take the money out of their pension once they reach the age of 55. Traditionally, pensions have been quite hard to conceal (although it is possible in some cases to move them offshore), but the new pension freedoms mean it’s much easier for husbands or wives to empty their pension and spend – or hide – the money.

SAVVY TIP: Family lawyers say that if you know your marriage or civil partnership is heading for problems and the partner with the bigger pension is aged 55 or approaching 55, take legal advice. You may need to draw up a legal document stating that your partner won’t take money out of the pension.

Related articles:

What to look for when hiring a divorce lawyer

Don’t miss out on the pension if you get divorced

Are you affected by financial abuse? What can you do if your partner is controlling over money or abusive?

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