What happens to pensions when you get divorced?
Pension pots tend to be one the largest assets a couple has, second only in many cases to the matrimonial home.
But how do you divide these, or should you, if you’re separating or getting divorced?
Like any other matrimonial asset — an asset the couple has accumulated either in sole or joint names following the marriage but before separation — the pensions need to be valued as part of the financial disclosure process.
Cash equivalent transfer value
Once the date of separation, also called the relevant date, has been agreed, you need to request the cash equivalent transfer value (CETV) for your pension on that date.
This is the figure we use when we’re considering any division of the overall matrimonial pot.
It’s worth having that date agreed before you contact your provider though: some might charge for calculating the CETV or recalculating it if it is within 12 months of the original calculation.
It’s important to tell your pension provider you need the CETV for a Scottish divorce. That’s because it’s calculated differently here than elsewhere in the UK. Here, the CETV is the apportioned value of your pension from date of marriage to the date of separation. In England however, the figure includes any value from pre-martial contributions.
Plus, if you’ve consolidated your pre-marital pensions while you’ve been married, let your solicitor know. The consequences here can be considerable because, in essence, non-matrimonial funds have been converted to matrimonial funds and are now considered part of the overall “pot” for dividing.
It’s important to remember too that while there are different types of pension memberships, in line with the Supreme Court case of McDonald v McDonald  UKSC 52, you should obtain values for all funds, regardless of whether your status is —
- Active — you are paying into the pension
- Deferred — you no longer contribute to the pension and are not drawing from it
- Pensioner — you are no longer contributing and are drawing down your pension
You may also have annuitized your pension, but will still need to check the value and provide formal confirmation to your solicitor.
One pension often forgotten about is the state earnings-related pension.
The value of these can be significant. You can find out how much yours is worth by contacting the Pension Service and completing the appropriate form. Your solicitor can advise further on this.
Now you have the values
You’ll need to give the values to your solicitor so they can consider your position.
It might be that the provider has forgotten to apportion off any pre-marital contributions, and if that is the case, the solicitor can apportion the value for you.
If part of your financial settlement includes a pension share, your solicitor will need to draw up a minute of agreement (also known as a separation agreement) which includes a qualifying agreement.
This will then be sent to your provider for them to confirm they will be able to complete the transfer of funds.
Once agreed, your minute of agreement can be signed and then registered in the Books of Council and Session in Edinburgh.
However, it doesn’t end there.
It is a common misconception that simply signing the agreement is enough, but in Scotland the pension share cannot take place until after the decree of divorce has been issued.
Once issued, there is a strict time limit of two months to intimate the pension share on the provider, which is usually the job of the person seeking the pension share or their agents. Once this has happened, the provider has a statutory period in which to complete the transfer.
If you are giving the pension share it’s important you do nothing with your pension until after the funds have been transferred out of your scheme as this could result in financial repercussions.
In England the process must be done via a pension sharing order which only the courts can grant.
Should I include pensions?
Many couples consider whether to include pensions as part of the financial separation process. While some people don’t, it can be a good option depending on your circumstances.
For example, they can be large assets and can be a good way for couples to balance the financial settlement easily if there are limited cash reserves. Or, if the couple’s younger they will have more time to accumulate pension benefits.
You don’t have to share your pension benefits though.
If there are other assets available, you may decide to share a larger portion of another asset instead.
Mr A has a pension valued at £100,000 and he jointly owns a house with Mrs A worth £300,000. This would give an overall matrimonial pot of £400,000.
On an equal division, both parties would need to have assets of £200,000.
If Mr A wanted to keep his pension and not share it with Mrs A then he would need to give her a larger share of the house value. In this example that would be £200,000 paid to Mrs A from the sale proceeds and Mr B would receive £100,000 from the sale with the other £100,000 being retained in pension.
What else should I consider with pensions?
- Pension beneficiary form — once you’re separated, you will need to update your pension beneficiary form if you no longer want your spouse to benefit from the pension if you died
- Pension share v earmarking — a pension share is when part of one spouse’s pension is transferred to the other. Once completed, the spouse receiving the pension share can take the tax free lump sum (assuming this has not already been taken beforehand) and can draw income from it – assuming they are of age to do so. This also gives the couple a clean financial break. Earmarking is where the spouse with the pension has a certain amount ‘earmarked’ for their ex-spouse in their current fund but that can only be paid when this spouse starts taking payments. In Scotland, only the lump sum pension elements can be earmarked so this limits the amount of pension that can be divided
- Independent advice — as you’d expect, it’s important to take independent financial advice about your pensions when you’re getting divorced. An independent financial advisor (IFA) will be able to talk through your options in detail, including whether you keep you funds in your current scheme or move provider
- The cost — as well as legal costs to complete the paperwork, it’s worth bearing in mind that most providers will charge for these types of changes to your pension. The fee could well be upwards of £1,000. As such, it’s worth asking your provider to confirm the cost at the same time you request your CETV. Usually, this sum is shared between the couple
If you'd like to find out more about topics including divorce, take a look at our family law category.