If you’re getting divorced and your husband, wife or civil partner has a large pension, it can be divided – or shared – when you divorce.
But how does this work and what happens to your pension after you divorce?
Pension sharing in brief
If you get divorced and one of you has a much larger pension than the other, it can be split, or shared at the time you get divorced. In England and Wales, the person who is receiving some of their ex’s pension will get a percentage of its value. In Scotland, this can be expressed as a percentage or a fixed amount.
In order for the pension to be shared, it must first be valued. This can be complex, especially with final salary type pensions, where your retirement income is based on a percentage of your final salary and the number of years you’ve worked for your employer. The final value of the pension and therefore the amount one partner will get, is only worked out the day before the final court order is made.
Catherine Morgan is a financial planner who offers financial planning and coaching for women at The Money Panel. She says that if you know you’re getting a share of your ex’s pension, it’s important to get help as early as possible. “If the pension is a final salary pension, it may take some time to gather information together about your options – and the information can be difficult to interpret.”
In England, Wales and Northern Ireland, pension sharing must be formalised in a pension sharing order of the court. In Scotland, a court order doesn’t have to be used when splitting pensions. Couples can agree how much of the pension to share in a settlement negotiated by their solicitors.
Find out more about how pension sharing works here.
The pension after divorce
You can be given a share of the pension which you must transfer into your own pension or start a new one. You can’t spend this money or put it into a savings account. All private sector and personal pensions have to offer this option.
You can become a member of your husband, wife or civil partner’s pension. This is more likely to be offered to you if the pension that’s being shared is a public sector pension.
What to do with the pension
You may not have a choice as your ex’s pension scheme may not let you join it. However, if you do have the choice, you’ll have to weigh up whether to transfer your share of your ex’s pension into an existing pension you have or start a new one.
Seek financial advice
Unless you’re comfortable making decisions about where to put the pension share, this is a good time to talk to a financial adviser. Rebecca Aldridge, founder of financial planning firm Balance: Wealth, based in Nottingham, says: “It’s a time when it’s vital to take advice from a financial planner because it can be difficult to compare all the options and to see which is best. A professional planner can look at the cost of each pension plan, whether there are any special features or guarantees and if it gives you all the options you’re likely to need.”
Having a financial planner involved can help you make practical decisions at an emotional time. They can also help you decide whether pension sharing is the best route for you, or whether you might be better dividing your pensions another way. For example, you might decide instead to offset your savings, which means you each hang on to your own pension rights but the value of your pensions is offset against other assets, such as the family home.
You can find a local financial adviser on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
Learn more about sorting out your finances when a relationship ends here.