Managing pensions and divorce when UK married couples split up is a big challenge. And it's one that more and more of us are facing.
Before the pandemic, divorce rates were already rising. Then lockdown put extra pressure on many already strained relationships. In early 2020, one law firm saw a 122% increase in divorce enquiries.
Then 'no fault divorces' began in April 2022, creating another separation spike. In their first week, the number of divorce applications went up by half. In the year since then, applications have climbed again by about 11%.
From a pensions and divorce point of view, that worries us.
If you’re getting divorced, you’re legally required to take pensions into account as part of your settlement. One in four divorces involves people aged over 50; a time when it’s particularly important to keep an eye on your pension. And ONS statistics show divorces among the over-65s are growing.
But if you’re in the process of splitting up, you might not be sure how to protect your pension in a divorce. UK couples find this challenging, especially older ones.
The importance of pensions in divorce
When you divorce, pension pots can be one of your biggest assets, after the family home. So it’s really important to divide them up fairly. But just 12% of 50-plus divorcees took pensions into account when dividing their assets. 24% actively turned down a share of their partner’s pension.
Katharine Photiou, who as Managing Director of our Workplace Savings business helps hundreds of thousands of working people manage their pensions, says:
“People going through divorce are too often unaware of what they are entitled to, or overlook the key steps to successfully financially separating from their partners. This is particularly true when it comes to pensions, which could leave people worse off in retirement.”
That can create some big problems, especially for women. Female divorcees are more likely to:
- Waive their rights to their partner’s pension during a divorce, despite entitlement to a share of their private pension wealth.
- See their annual income fall by almost twice as much as men after the divorce, making it harder for them to save into their own pensions.
They risk ending up without the funds they need for their ideal retirement.
How to protect your pension in divorce
Debora Price is Professor of Social Gerontology at the University of Manchester and co-author of ‘A Guide to the Treatment of Pensions on Divorce’. She’s thought a lot about pension sharing in divorce. She wants to help people understand their rights, and make sure they split their pension assets fairly. She told us that getting expert advice is essential.
“The whole issue of dividing pensions on divorce is hugely problematic,” she explained.
“Pensions are really complex, and people are generally under enormous strain when going through a divorce – they just don’t want to think about it, which results in many unfair outcomes.
People are reluctant to consult financial advisers, who could help considerably, not only on the division of assets on divorce, but also with long-term planning following divorce. There is a real role for experts in this space.”
Our research shows that just 3% of people take professional financial advice when divorcing. Over-50s who get divorced, are four times more likely to seek advice from friends than a financial adviser.
That doesn’t lead to good results. A third of people who divorce over the age of 50, end up believing the outcome was financially unfair. 20% of the people we surveyed said, on reflection, their divorce had made them more likely to seek professional financial advice in the future.
What to think about and where to get professional advice on it
If you’re divorced and don’t have a legally binding financial settlement, there’s no time limit for making a claim on your ex’s finances. It’s best to agree one sooner rather than later, so you can both confidently plan your new lives.
- Understand how you can share any pension assets. The free Pension Wise service from MoneyHelper is a useful starting point. It outlines how you can divide different kinds of pension. This can be a complex area – a family lawyer will help you set up the right agreement to formalise it.
- Get free guidance on your pension options. The Money and Pensions Service is an independent body offering impartial support on pension issues. It offers a free Pension and Divorce Guidance service over the telephone. It’ll run you through your choices, and what you need to think and ask about. It can also point you in the right direction for regulated financial advice. You can find out more and book an appointment on its website.
- Plan how to divide any of your shared assets, and invest the proceeds of your settlement in the most tax-efficient way. A financial adviser can help you with this, but you’re likely to be charged a fee for their services. The Unbiased website will help you find an adviser if you don’t already have one.
- Check your beneficiaries. After a divorce it’s a good idea to update or write your will, and check other important documents (like life insurance policies), to make sure your estate will be divided up in the way you want. And make sure your executor(s) know where to find all your paperwork!
- If you’re still working, you may want to consider income protection. If you couldn’t work due to illness or injury, would you be able to cover all of your monthly outgoings? Our income protection page will show you how we can help – and again, you can talk to a financial adviser for an independent perspective.
How would you pay your bills if you couldn't work due to illness or injury?
Income protection insurance can give you peace of mind when you need it most, by paying out a regular monthly amount.
How are pensions split in divorce?
Pensions are seen as a joint asset, so they’re usually split equally when you divorce. But that’s not always the case. Divorcing couples can go for different kinds of pension divorce settlement, depending on:
- How many children they have
- Their individual financial means
- How long the marriage lasted for
- Their ages and any health conditions that affect them
- Their marital contributions (e.g. if one of them stayed at home to raise the children).
And there are many different pension and divorce choices. Depending on your needs, you can set up:
- A Pension Sharing Order, which tells the pension-holder to share a specific amount or percentage of the transfer value of their pension
- Pension Offsetting, where the holder shares less or none of their pension and lets their spouse or partner take more of another asset, like a shared house
- Pension Attachment and Earmarking, where some or all of the pension’s benefits go straight to the non-pension-holder once it starts paying out
- Deferred Pension Sharing, where the divorcing couple put off sharing the pension until a later date, for example when the non-pension-holder retires
- Deferred Lump Sum, where the pension-holder makes a lump sum payment to the other partner when they retire
- An Individual Agreement, where a divorcing couple make their own decisions about how they’d like to handle any pensions
Final salary pensions are split differently. Couples can either:
- Transfer the final salary pension into a regular pension pot and divide it between them
- Split any income the pension pays out once it’s actually paid.
And you can’t share the old basic State Pension or the new State Pension. Instead:
- If one of the couple has already retired, the other is entitled to a 25% tax-free lump sum of any workplace or personal pensions they have, whether or not the pension-holder has taken their own 25% lump sum
- If a couple are cohabiting but are not married, they don’t have any rights to the other’s pension, even if they have children together.
Divorce and retirement
Many more people are getting divorced either shortly before or once they’ve retired. That will have a big impact on their retirement planning.
If you divorce just before you retire, you or your spouse might have to choose between not achieving the retirement lifestyle you’d hoped for, and retiring later than planned. If you’re already retired, then one or both of you might lose some income, and maybe even need to go back to work.
And whatever life stage you’re at, the divorce process itself can be expensive, with a lot of costs and fees along the way. Separating your finances out can also be technically quite challenging. That’s why, once again, we’re going to recommend getting professional legal and financial advice.
We’ve already covered the practical advantages of getting professional advice. It’s also worth remembering that even the easiest divorces can be an emotional whirlwind.
Having calm, objective advice from experienced people who’ve helped many others already, can make a big difference. It’ll still be a difficult time. But hopefully they’ll help take the sting out of it, making everything less rather than more challenging, and leading to better outcomes for both of you.