Approximately one third of UK marriages recorded in 1998 subsequently ended in divorce by the fifteenth anniversary, according to the Office for National Statistics. Someone’s pension could be the most valuable asset they own, so what happens to it in the case of divorce?

There are three ways a pension can be divided on divorce: offsetting, earmarking and sharing.

Offsetting

Pension offsetting provides a clean break between those involved in the divorce or dissolution of a civil partnership. In simple terms, it involves working out the value of your pension and then allocating assets of the same or similar value to your ex-spouse or civil partner.

For example, if in the divorce of a husband and wife the marital home and the husband’s pension are both valued at exactly £200,000, under an offsetting arrangement the wife might get the house and the husband would keep his entire pension pot.

Earmarking

Pension earmarking (sometimes referred to as ‘attachment’) orders redirect part or all of a person’s pension benefits to the ex-spouse or civil partner when it starts being paid. If you go down this route, all of your assets and those of your ex-spouse or partner are taken into consideration.

The rules are slightly different depending on where you live. In England, Wales and Northern Ireland the payments can be made from the individual’s pension income and/or their 25% tax-free cash. In Scotland, they can only be taken from tax-free cash – so the income portion cannot be touched.

While straightforward in theory, there are a number of things you need to be aware of:

If you die before you reach retirement, your ex-spouse or partner may receive nothing;

Your ex-spouse or partner does not receive anything until retirement benefits are drawn;

If you retire early or stop contributing to pensions, your ex-spouse or partner may receive less than expected

If you die after you have started drawing retirement benefits, any income due to your ex-spouse or partner will stop.

Sharing

Pension sharing is currently the most common way to split pension benefits. Under this option, a fixed percentage of an individual’s fund – referred to as the pension credit – is awarded to the ex-spouse or partner.

The advantage of this option over earmarking is that the pension allocated to the ex-spouse can be transferred to a different scheme before any benefits have been taken, although you need to be careful you don’t lose any existing protections if you have a very large pot. You can also divide the pot if the pension is in payment.

Tom Selby,

Senior Analyst, AJ Bell

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