Dividing Pensions in Divorce: Understanding Your Rights and Options to Protect Your Financial Interests

Pensions, considered “illiquid” retirement assets, are fundamental parts of Matrimonial Assets and must be included in the discussion of financial settlements during divorce proceedings. The law recognises that both parties have a right to a fair share of the pension assets accumulated, regardless of who earned them. The Court will not discriminate between which party earned the pension.  

Often, there will be a significant difference in the value of a couple’s pension, as women often take a step back from working to raise the children. Statistically, women are also more likely to live longer than men, making it even more important to consider life after retirement.

It is best to begin the divorce negotiation by sharing complete financial details, including pension valuations and their update-to-date value (i.e. Cash Equivalent Value) for each pension held to ensure transparency.

There are different options to deal with pensions in a financial settlement. The best one for you will depend upon your circumstances.

• Pension Sharing - a portion of one party's pension is allocated to the other party by transferring a percentage of the pension value to a separate pension plan. This allows a clean break.
  

• Pension Offsetting - the value of the pension is offset against other assets, such as real estate or savings, allowing each party to retain equivalent assets, while the spouse with a lower pension receives some additional assets instead. This is typically a larger share of equity in real estate or a lump sum of money. However, it can be difficult to compare an “illiquid” pension asset as against a “liquid” asset such equity in real estate or savings.  Therefore,  it is important to obtain specialist legal advice.
• Pension Attachment - A less common approach. A Pension Attachment Order “earmarks” an amount of the pension pot, which will then be paid out to the other spouse when the pension comes into payment at retirement.   It is riskier than Pension Sharing and therefore rarely used.  This is because the pension usually stays with the pension holder.  If the pension holder passes away before retirement, the other party is left with nothing. 

When negotiating the division of pensions in a divorce, it is essential to consider factors such as the length of the marriage, the financial needs of each party, and any other relevant circumstances.

There are several factors that can impact what a fair figure is when considering equalisation. For example, solicitors will advise you if pre-marital contributions will affect this. On some occasions, the age of you and your spouse and any health conditions may warrant adjustments.

There may also be some circumstances when a Court may decide that a pension should not be divided, and these tend to fall into one of the following categories:

• the marriage has been a short one and it is not equitable to divide the pension fund;
• the pension fund is very small and the cost of dividing it would not be worthwhile;
• the pension fund has been accumulated following separation; or
• the pension fund was accumulated before marriage.

In looking at these circumstances the Court will consider the “needs” of the parties as an overarching factor. 

By approaching the division of pensions in a divorce with a clear understanding of your rights and options, you can work towards a fair and amicable settlement that meets the needs of both parties involved.