Pensions and divorce - how to split your retirement savings

Divorce applications often surge in the new year - but many overlook splitting pension assets. Here's what you need to know about pensions and divorce when a marriage ends

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A divorce can be a costly affair - and while you may be thinking about who gets the house and how to share time with the kids, pensions is also an important discussion point - but one that often gets overlooked. 

Divorce lawyers are expecting a boom in enquiries as the pressures of the festive period often leads warring married couples to file for separation in the new year. 

The first working Monday of the new year has earned the unfortunate nickname of 'Divorce Day' among solicitors because there is often a spike in couples filing for divorce.

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Ministry of Justice data shows most divorce applications typically come in the first quarter of the year.

“Divorce is so difficult and distressing that nobody would rush into it after one bad Christmas,” says Sarah Coles, head of personal finance, Hargreaves Lansdown:

“However, a fortnight of one another’s company can be the straw that breaks the camel’s back. Divorce lawyers see an uptick in enquiries immediately after the festive period – rivalled only by the rush just after the summer holidays.”

Much of the focus during divorce proceedings may be on who gets the house and how children are looked after, but legal and financial experts warn it is important to pay attention to pensions.

In around half of couples, 90% of the pension wealth is held by one partner, usually the husband, leaving women at a financial disadvantage and increased risk of poverty in retirement if the marriage ends, Stowe Family Law has warned.

The rise of DIY divorces, which can be performed online often without the help of a solicitor, means there is more risk of important assets such as pensions being overlooked.

“Dealing fairly with pensions on divorce remains an often overlooked area for separating couples, with those who attempt a DIY divorce most likely to run into problems,” says Matthew Taylor, a partner at Stowe Family Law.

“Only 12% of financial orders on divorce contain a pension sharing order, and it remains all-too-common for parties, usually the wife, to ignore claims against their spouse’s pension or forego claims due to a desire to retain the family home. 

 “While this can be a sensible approach, many fail to understand the true value of the pension share they are giving up, and women are at risk of trading a long-term guaranteed income for short-term stability.”

It comes as interactive investor’s Great British Retirement Survey for 2023 found two-thirds of divorcees had not discussed pensions during divorce proceedings. 

The investment platform warns women are seemingly at greater risk of missing out on pension money in divorce, with three-quarters of divorced women surveyed admitting to not discussing pensions as part of their settlement, compared with 56% of divorced men. 

“Most couples don’t discuss pensions during divorce proceeding, which is leading to many people – particularly women – missing out on future income which probably should have been theirs,” says Myron Jobson, senior personal finance analyst for interactive investor.

How to deal with a pension in divorce

A pension rather than property is typically the largest asset for divorcing couples, accounting for 42% of household wealth on average, according to the Office for National Statistics, so it is important to take account of retirement income and get it valued properly.

“If your spouse has been building up a pension for years, pension specialists are particularly valuable,” adds Coles.

“You should get a pension valuation as part of the financial disclosure, and it may be worth paying an adviser to check the numbers. 

They can also help you pick the most appropriate way to share a pension.

“After the split you also need to ensure you revisit your pension arrangements, and work out how you can undo some of the financial damage from the divorce.”

There are generally three options with a pension in divorce.

A court may issue a pension sharing order that states how much of one partner's pot should be transferred to the ex.

It is important to take legal and financial advice to understand any implications of these routes as it could affect your own income.

Each option has its own pros and cons.

Splitting or sharing a pension gives each person control over their own money but can lead to a reduction in the value of your retirement pot that you need to make-up later.

Offsetting a pension against other assets can involve complicated calculations, while earmarking gives the original pension saver control but the payments will stop once they die.

“Particular difficulties and confusion can arise over defined benefit (DB) pensions in a financial settlement,” adds says Ben Glassman, head of family and divorce at Evelyn Partners.

“Valuable DB pensions provide a guaranteed income for life and need careful consideration on how they should be valued and split for matrimonial purposes – not least because different schemes use different valuation calculations.   

“Even when a DB pension has been valued, the question remains as to how it might be shared or offset. These issues have been complicated still further by recent volatility in the bond market, as DB valuations depend in part on gilt yields. As these soared to their highest in 15 years last year, DB valuations have plunged and in some cases nearly halved.”

State pensions are also important.

“Women especially often have gaps in their career, which could affect their state pension entitlement. It’s important to obtain a projection, particularly when looking to equalise the pension entitlement of the two spouses,” says Glassman.

“The value of a guaranteed income of £10,000 inflation-linked from age 66 currently until death is not to be underestimated.”

Marc Shoffman

Marc Shoffman is an award-winning freelance journalist specialising in business, personal finance and property. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and The i newspaper. He also co-presents the In For A Penny financial planning podcast.