How to protect your pension in a divorce

9th May 2022

Why should you consider pensions on divorce, and what happens if you ignore them? Beware of these common pitfalls. We look at how to protect your pension in a divorce.

With the advent of no-fault divorce and the Her Majesty’s Courts and Tribunals Service (HMCTS) online divorce platform, it is easier for couples to obtain a divorce themselves, especially in cases where the separation is amicable. However, many couples inadvertently overlook the financial aspects of their separation when doing so for a variety of reasons.

It is common for one party to stop work for a period, for example when they have children, ceasing their pension contributions in the process, whilst the other party continues to work and build a pension. Whilst the relationship is on track, this is not considered problematic on the basis that when the parties reach retirement they will still have sufficient income despite one of them having a reduced pension pot. However, following divorce the ability to benefit from the other’s pension will disappear unless the pensions are properly shared at that time and only a court order can achieve this. Unless you are over 55 and able to take funds out, a pension pot does not seem as tangible an asset as cash or a house might, but it is still a valuable asset that should not be overlooked. To put this into context, the value of combined pension assets is often as much as, if not more, than the equity in the home. Failing to examine the pension position could leave one party significantly worse off later in life than was intended when earlier decisions were made.

Beware the risks

Many people consider they have properly dealt with pensions by offsetting capital, usually equity in a house, for pension assets.  For example, one party may retain a house with £200,000 of equity in exchange for the other retaining their £200,000 pension pot. This can be a dangerous approach, however, as a pound in a pension is not the same as a pound in cash/equity. The pension has a notional value for divorce, known as a cash equivalent transfer value (CETV), but the primary aim of a pension is to provide a retirement income. Offsetting the pension could result in a significant financial imbalance in the future that neither party had intended. If offsetting is being considered it is important that proper advice is sought before any agreement is signed.

It is important to be aware that without a Court Order that deals with the finances, each parties’ financial claims remain open unless or until re-marriage. Many couples who separate their finances amicably do not realise that a pension can only be split with a court order on the back of a divorce or dissolution of civil partnership. Those who enter into a separation agreement to formalise the terms of their agreement are unable to split a pension asset as this can only be achieved by court order. This could leave one party financially vulnerable in their retirement unless proper advice is taken.

Here to help

Involving solicitors need not be a daunting experience, or mean that matters will not be dealt with amicably. The Collaborative Law process, for example, will enable the parties to sit down together with their lawyers at a round table meetings and openly discuss the divorce and the finances. The lawyers can advise on the legal position and ensure that all aspects are covered, whilst the parties retain control of the terms agreed. This transparent process avoids the traditional sending of letters back and forth between lawyers that is often held responsible for causing relations to sour and involves everyone signing an agreement committing themselves to resolving matters outside of court. More information on the Collaborative process can be found on the Resolution website here.

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