Understanding the Role of Pensions in UK Divorce Settlements

Did you know that pension sharing is included in just 10% of divorces? 

If you are going through a divorce, you may be feeling anxious about where you will live, how your children will adjust, and what your financial future might look like. What you may not realise, however, is that your pension could actually be one of the largest assets involved in your divorce. Therefore, if you want to protect your long-term financial security, it’s vital that you understand how your pensions will be valued and divided as part of the settlement process.

In this blog, we explore everything you need to know about divorce and pensions in the UK, and share some practical advice to help you protect your retirement income after separation.

Why Pensions Get Missed During Divorce Proceedings

There are several reasons why pensions are often forgotten in divorce settlements:

• They feel distant and intangible compared to property.
• Divorce valuations can be complex.
• Many people don’t fully understand their own pension benefits.
• Negotiations often focus on immediate housing needs.

However, your pensions matter more than you might realise. If you are in your 40s, 50s, or older, then the pension that you have spent decades building could actually be worth more than your home or savings. If your pensions are not properly discussed and valued at the start of the divorce process, you could find yourself agreeing to a settlement that leaves you financially exposed in retirement.

The Main Ways Pensions Are Dealt With in the UK

There are three main approaches to handling pensions in financial settlements in the UK.

1) Pension Sharing Order

A pension sharing order is often the most straightforward way to divide your pensions during divorce. It involves transferring a percentage of one spouse’s pension into a separate pension pot in the other’s name. This results in a clean financial break, where each of you independently controls your own pension benefits.

This approach is particularly useful if one of you has little or no pension provision of your own. However, it’s vital that you undertake a professional valuation to ensure that the percentage being shared genuinely reflects a fair division of your future retirement income.

2) Pension Offsetting

Pension offsetting in divorce involves trading your pension rights against other assets. For example, you may retain your pension, while your ex-partner keeps more of your property or savings to balance out the overall settlement.

Offsetting could be the ideal solution if:

• Both of you have comparable pension provision.
• One of you needs to retain the family home.
• You have sufficient non-pension assets between you to ensure a fair trade-off.

However, pension offsetting does carry risk. A pension is a future income stream, while property is a capital asset. If this isn’t carefully analysed by a professional financial adviser, you could agree to an arrangement that seems fair on paper but leaves you with significantly less income in retirement than you expected. 

3) Pension Attachment Order

A divorce pension attachment order (sometimes called earmarking) dictates that a portion of your retirement income is paid directly to your former spouse rather than to you. However, this approach is not very common today. It does not provide a clean break and it all depends on your individual retirement decisions – if you delay drawing your pension, your former spouse must also wait.

How to Protect Your Retirement Income During Divorce

1) Ensure Full Pension Disclosure

Start by getting up-to-date values for every pension that you or your spouse holds. This includes your workplace pensions, personal pensions, and any older schemes from previous jobs. If all your pensions are not fully disclosed, it becomes very difficult to reach a fair agreement.

You will usually be given a Cash Equivalent Transfer Value (CETV), which places a current cash figure on the pension. This is helpful to see, but it does not necessarily show what the pension could actually pay you in retirement, especially with defined benefit (final salary) schemes. We recommend consulting a specialist pension expert to explain what the pension is really worth in terms of future income.  

2) Carefully Consider Your Settlement Options

Before signing any agreements, make sure that you understand how each option will impact your future. For example:

• A pension sharing order splits the pension at the time of divorce so you each have your own retirement pot. The percentage needs to be carefully calculated to ensure it produces a fair long-term outcome.
• Pension offsetting means that one of you keeps more pension while the other keeps more of another asset, such as the family home. This option can provide short-term financial security, but it may reduce your future retirement income.
• A pension attachment order requires part of your pension income to be paid to your former spouse when it is drawn. This means that your retirement timing and income could remain linked to your former partner’s decisions.

Looking at different scenarios and seeing how they affect your retirement income can help you make a more confident decision.

3) Formalise the Agreement Legally

Any decision you make about your pension must be legally recorded in a court order. A pension sharing order in the UK only takes effect once it has been approved by the court and carried out by the pension provider; verbal or informal agreements are not enough. 

Once your divorce is finalised, we also recommend reviewing and updating your pension beneficiary nominations to reflect your new circumstances.

Securing the Fairest Possible Outcome for Your Pension 

At Piercefield Oliver, we believe that divorce is not just about reaching a legal agreement; it’s about protecting your long-term financial future. We work alongside your solicitor to help you understand what your pension sharing options look like in practical terms. Rather than focusing on just the percentages or headline figures, we look at the income your pensions are likely to provide, and how different settlement choices could affect your future lifestyle. 

We can help you:

• Understand the true value of your pension benefits.
• Compare pension sharing and pension offsetting options in a clear and straightforward way.
• Model your future retirement income under different scenarios. 
• Rebuild and restructure your financial plan after divorce.

If you are navigating divorce and pensions in the UK and need some guidance tailored to your specific circumstances, book your free consultation with one of our divorce financial advisors today.