Pension Sharing on Divorce: What You Need to Know

Why Pensions Are So Often Overlooked

In most long marriages, one or both spouses will have accumulated pension savings that may be worth more than the equity in the family home. Yet pension sharing is one of the most commonly neglected aspects of divorce settlements. This happens because pensions are invisible in daily life, their value is hard to understand, and people focus on assets they can see and touch.

The consequence of overlooking pensions in a settlement is often irreversible. Once a consent order is approved by the court and the financial claims are dismissed, the right to make further claims is extinguished. You cannot come back years later when you discover the pension was worth considerably more than you realised.

The Cash Equivalent Transfer Value

The starting point for valuing a pension in divorce proceedings is the Cash Equivalent Transfer Value (CETV). This is a figure provided by the pension provider on request, representing the lump sum equivalent of the pension benefits accrued. CETVs are not always straightforward to interpret: a defined benefit pension (such as a public sector or final salary scheme) with a CETV of £200,000 typically provides significantly more future income security than a defined contribution pension with the same CETV. Expert actuarial advice is needed for any significant pension.

The biggest mistake people make with pensions in divorce is treating the CETV as if it were equivalent to cash. It is not. The value of a pension depends on what it will actually pay out in retirement, which requires expert analysis to assess properly.

The Three Ways of Dealing With Pensions

There are three main approaches to pensions on divorce. Pension sharing: a pension sharing order directs a percentage of one spouse's pension to be transferred to the other, creating an independent pension for the recipient. Pension offsetting: the pension is offset against other assets, such as a larger share of the equity in the family home. Pension earmarking: an order is made earmarking a share of the pension to be paid to the former spouse when the pension comes into payment, but this approach has significant disadvantages and is rarely used now.

Pension Sharing Orders in Practice

A pension sharing order specifies a percentage of the pension to be transferred. The pension provider implements the order by creating a pension credit for the recipient, who then has an independent pension in their own name. The transfer typically has costs associated with it, and both parties should understand who bears those costs before finalising the order.

When You Need Expert Help

For any significant pension, particularly defined benefit pensions or public sector pensions, you should obtain advice from a pensions on divorce expert (PODE), a specialist actuary. Their report will value the pension properly and advise on what pension sharing percentage would achieve an equal or fair division of future pension income. This is not cheap advice, but the cost is trivial compared to the lifetime value of getting the pension division right.