Sharing a final salary pension on divorce can be a challenge, as it doesn’t involve simply dividing a pot of money between you and your ex.
Final salary pensions typically pay a guaranteed income in retirement, so you’ll need to work out how the partner who isn’t a scheme member can receive a fair share. This usually involves seeking professional advice, and some detailed calculations before a decision is reached on how to share the pension.
Here, we explain what happens if you or your ex-partner has a final salary pension scheme, also known as a defined benefit pension, and what you can do to ensure a fair outcome.
- How are pensions shared on divorce?
- How are final salary pensions shared?
- How is a final salary pension valued on divorce?
- Why do you need a consent order?
- How can you ensure you receive a fair share of your ex-spouse’s final salary pension?
- Can a final salary pension be shared that is already being paid?
- What if you are already divorced?
- Where to go for advice
How are pensions shared on divorce?
Each divorce is considered on a case-by-case basis, and there are several methods of dividing a pension on divorce. Find out more in our article How are pensions shared on divorce?
Pension offsetting: In this scenario, the value of the pension is offset against other assets, such as the family home. This could mean, for example, that you receive a larger share of home in exchange for no entitlement to your ex-spouse’s pension, or a smaller proportion of it. It’s only possible if there are other major assets that can be offset against the pension.
Pension sharing: This is when pension benefits are split when you divorce, and usually, the partner without or with a small pension receives a share of their partner’s benefits in their name, to equal the projected pension income in retirement. The share you receive may be kept in the pension scheme, or moved to a new pension, but it depends on the scheme rules. This option enables a clean break, with each party clear on how much pension is being given up and received.
Pensions attachment order, also known as ‘earmarking’: This option is increasingly rare. However, in this case, you receive some of your ex’s pension when they retire and it is paid to them. This could be paid as an income, lump sum or both, but in this scenario you cannot start receiving pension payments until your ex starts taking pension benefits. Therefore, it can be difficult if you’re older and relying on pension payments for your own income.
This option could also mean you have to wait until your ex-partner retires or dies to receive a share of pension benefits, and you have no control over how this money is invested, and may receive less than expected.
How are final salary pensions shared?
There are two main ways to divide a final salary pension with an ex-spouse, depending on the terms of the financial settlement.
The first is to transfer the pension into a defined contribution pension pot that can be divided between the parties in one of the ways outlined above. However, in this scenario, the pension’s transfer value may not reflect the actual pension benefits of the scheme, so it’s not necessarily the best option and you’ll need to take advice from a professional financial advisor. Bear in mind, too, that not all final salary pension schemes allow transfers out, so this option may not be possible. Read more in our article Should I transfer my final salary pension?
Alternatively, a final salary pension may pay out a share of the guaranteed income to the ex-spouse and allow them to join the scheme in their own right. However, this option may only be used in some cases if the scheme will not allow the pension to be transferred out.
William MacFarlane, family lawyer at Kingsley Napley, said: “There are also pension attachment orders where the pension pays out a proportion of the income to the recipient. But this ends when the party with the pension dies, so it is far less popular.”
How is a final salary pension valued on divorce?
Pension providers use the so-called ‘Cash Equivalent Value’ (CEV) to provide a current value, which is made up of the total contributions and investment returns. However, this isn’t always accurate, as calculations can vary between providers and produce unfair outcomes on divorce. This is particularly the case when it comes to final salary pensions, when it’s usually wise to seek advice from a financial adviser or a pension specialist to determine an accurate valuation.
If a final salary pension is transferred to a defined contribution (money purchase) pension scheme in order to be shared on divorce, the current provider will use the CEV once this is agreed. However, to make an agreement legally binding when it comes to pension sharing, you need to draft a consent order and ask for the court to make this legally binding.
Why do you need a consent order?
If you cannot agree on pension sharing, a court can put in place what’s known as a ‘consent order’. You do not need to attend court for this to be enforced. This may state that the final salary pension is being transferred to another scheme, or the ex-partner will join the scheme in their own right.
Melissa Markham, associate family and collaborative solicitor at Whitehead Monckton, said: “When divorcing, it is an essential part of your financial planning to have a consent order drawn up recording any financial agreement reached, but most importantly, providing for any further claims to be dismissed in order to protect your financial position going forward.”
“Essentially, no pension share can be effected without a sealed court order and a final decree in the divorce, both of which the relevant pension provider will require before they take steps to share a member’s pension.”
How can you ensure you receive a fair share of your ex-spouse’s final salary pension?
If you’re sharing income from a final salary scheme as part of the divorce process, it’s usually wise to arrange to have an actuarial report done to work out the benefits that should rightfully be paid to you. This will calculate the amount that should be paid to you given the formula that will be used to calculate retirement income based on a percentage of final salary, and the number of years you have worked for your employer. You can find out more about final salary pensions in our guide What is a defined benefit pension? An independent actually may be instructed by a divorcing couple, or ordered by the court, to recommend to the court the appropriate percentage of the fund that will be shared.
Sarah Green, family lawyer at Michelmores, said: “Often, the benefits associated with a pension are not immediately visible on the documents a provider will send out. This means it is very difficult to assess how best a couple’s pensions should be shared. A specialist actuary can carry out this calculation for you. Often, people are put off by the additional cost associated, especially where a separation is amicable and one party (usually with the lower pension provision) doesn’t want to rock the boat.
“However, particularly if you are the party with the lesser pension, or no pension, it is worth spending a little now to ensure you are properly provided for on retirement.”
Markham added: “Legal advisors will have good connections with a number of pension actuaries and will know what questions need to be asked and how to interpret the answers given in order to ensure your financial position is properly protected.”
Whether or not you are the scheme member, it’s important to get an accurate valuation of all the pensions held by both parties during a divorce. This can be more complicated than simply checking current pension statements for a specific value, as there may be several pots from previous jobs. Final salary pensions are particularly valuable, as they provide a guaranteed income at retirement, and their value may be much greater than a defined contribution, or money purchase pension. A divorce settlement requires that all assets are disclosed, so beware of legal action in the future if there is any attempt to conceal valuable assets.
Can a final salary pension be shared that is already being paid?
If someone is already receiving an income from their pension, pension sharing is still possible but the rules are more complicated, and as such specialist legal and financial advice is needed.
Green said: “Pensions can be a complicated area of finances on divorce. It is important for both parties to seek independent legal advice, even if everything else has already been agreed, to ensure that nothing is overlooked.”
What if you are already divorced?
If you are divorced, but didn’t have a financial order at the time, it is still possible to get a pension sharing order. Green said: “There is no time limit to this. Often, people separate, agree to split the equity in the family home and move on, but don’t think about their pension interests, and don’t have a legal agreement drawn up.”
A financial order on divorce usually provides for a clean break, including in relation to pensions. “This means that your financial claims against each other have all been dismissed by the court, you cannot ask for a pension share at a later time. There may be exceptional circumstances where an order can be reviewed and a lawyer can advise you about this,” said Green.
Where to go for advice
It’s extremely helpful to take both financial and legal advice at the start of the divorce process. A financial planner can help with working out and implementing the pension share, as well as reviewing your overall financial situation. For example, they may also provide advice on whether consolidating your pensions is a good option if going through a divorce results in you having several retirement pots, and where your retirement savings should be invested. For more information, check out our articles How to find the right financial adviser for you and How to get advice on your pension.
If you’re considering getting professional financial advice, Aviva is offering Rest Less members a free initial consultation with an expert to chat about your financial situation and goals. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
If you think mediation could be an option to help you resolve things, visit the National Family Mediation website. More divorcing couples than ever are seeking ways to go through the separation process amicably, without the need for lawyers.
Alternatively, you can find a solicitor with the help of Resolution, a membership organisation for professionals who work with separating couples. All members commit to taking a non-confrontational approach to help couples resolve their issues.