Let’s talk legal... Splitting Pensions When You Are Divorcing

By Evolve Family Law

For many families, their combined pension values can exceed the value of their family home. Understanding how pensions are divided is therefore essential to achieving a fair financial settlement and securing long term stability after a separation.

Why pensions matter when you are divorcing

It’s understandable that when couples start to discuss how to split their assets, they focus on their living arrangements, mortgage affordability and how they will pay their bills when moving from a two income to a one income household.

Pensions are often low down on the priority list. That can be a mistake because:

1. You can use the value of your spouse’s pension to argue that you should get more of the assets you want (pension offsetting).

2. Your spouse’s pension can provide you with a pension in retirement (pension sharing).

Pension imbalances

It is common for a pension imbalance to exist between spouses. This is often due to:

• Public service pensions compared to private pensions.

• One spouse’s career sacrifices due to part time employment during the children’s early years.

• One spouse was more fortunate in their choice of career than the other.

In divorce settlements, pension imbalances, where one spouse has a larger or smaller pension pot, can be addressed.

Pension sharing or offsetting

A pension sharing order allows a percentage of one spouse’s pension to be transferred into a pension pot for their ex-spouse. Once the pension is split, the pension provider creates two separate funds, ensuring pension independence and autonomy.

Pension offsetting weighs the value of one spouse’s pension against other assets, such as the equity in the family home or ISA funds. Offsetting may allow a spouse to keep all or most of their pension, or give them the option to stay in the family home by forgoing pension provision.

Valuing pensions

Two pensions may appear to be of similar value and therefore cancel one another out, but valuations can be deceptive. Whether you are pension sharing or offsetting, it’s essential to understand the asset’s true value before you negotiate to keep, offset, or share it.

Pensions are complex assets, often misunderstood, and because the money isn’t normally realisable, it is sometimes viewed as something to trade in to get the settlement you want now.

Pension decisions have long lasting consequences. Once the family court approves a financial order, you may have regrets, but you won’t be able to go back and negotiate for more.

A specialist family law solicitor can help you:

• Understand the true value of all the family’s pensions.

• Know the pros and cons of pension sharing and offsetting.

• Reality test settlement proposals in the short and long term, as downsizing from the family home in retirement to create a pot of money to retire on probably won’t create the same income in retirement that could have been achieved by agreeing to a pension share for the same amount.

Divorce settlement advice isn’t just about what you and your children need now. It is also about planning for your future financial security.

If you’re separating, don’t leave pensions to the bottom of the list. You need to plan long term for your life after divorce with expert guidance and a clear strategy to secure a fair financial settlement.