Pension Sharing on Divorce: What You Need to Know

Why Pensions Matter

Pensions built up during the marriage are matrimonial assets. In long marriages where one party has a substantial pension, it can be worth significantly more than the equity in the family home. Many people reach a financial settlement without properly valuing and dividing pensions, which can leave one party significantly worse off in retirement.

The Cash Equivalent Value

The starting point is the cash equivalent value (CEV) of the pension -- the amount the pension provider calculates the pension is worth if it were converted to a cash sum. You can request a CEV from the pension provider. For defined contribution pensions, the CEV is broadly the fund value. For defined benefit pensions, the calculation is more complex and the CEV can significantly understate the true value.

Types of Pension Order

There are three types of pension order available on divorce. A pension sharing order gives the recipient a defined percentage of the pension which is then transferred to a separate pension in their name. A pension attachment order directs part of the pension income to be paid to the other party when it comes into payment. An offsetting arrangement gives the pension holder their pension in exchange for other assets.

Getting Advice on Pensions

Pension sharing is complex. A pension actuary or independent financial adviser specialising in divorce can value pensions properly and advise on the most appropriate sharing arrangement. The cost of specialist advice is almost always worth paying given the amounts involved.

The Pension Advisory Group

The Pension Advisory Group (PAG) has published a guide to pension sharing on divorce that is available free online. It is primarily aimed at lawyers but contains useful information about the methodology and the questions to ask.