Divorce is often emotionally and financially overwhelming. With so much focus on the family home and dealing with immediate financial needs, as well as managing concerns about the welfare of children and other family members, pensions are frequently pushed to the back of the queue. Yet for many couples, a pension can be the largest asset of all – and failing to deal with it properly can lead to long‑term unfairness. Whilst it is very easy to concentrate on the “here and now”, in a divorce it is crucial to consider the long term and future needs of the parties and this should hold just as much weight during the financial settlement negotiations.

It is common for pension assets to be missed, overlooked or undervalued so taking early advice on all pension benefits, can make a real difference. The first steps to take are:

  • Identifying every pension – There is no one-size-fits-all approach and pension benefits held will vary in each case. This could include workplace schemes, personal pensions (often known as a SIPP or Self-Invested Personal Pension), defined benefit (occupational schemes) and State Pension entitlement.
  • Obtaining initial values (also known as Cash Equivalent Valuations) as early as possible, as delays here can stall negotiations for months. Solicitors will also consider the structure of the pension, for example if commercial property is held within a SIPP. The CEV will provide a present value or worth, of the future guaranteed income. There are currently significant delays in obtaining some public sector pension scheme valuations (which is well documented in the national press), so taking steps to obtain valuations as early as possible is more important than ever.
  • Flagging risk points – such as pensions already in payment, unusual scheme rules, remedial elections or missed contributions.
  • Considering the instruction of a PODE (a Pensions on Divorce Expert) – as lawyers we are not qualified to carry out calculations as to how pensions are shared and so it is necessary to involve an actuary or pensions expert to assist. The cost of the expert will usually be shared between the couple.

Why Pensions are Often the Biggest Asset in a Divorce (England and Wales)

In England and Wales, pensions are routinely one of the most significant – and misunderstood – assets on divorce. Research examining hundreds of divorce cases across England and Wales found that only around 11% of divorces result in pension sharing. Even where pensions exist, fewer than one in five cases include a pension sharing order.

They are often missed because:

  • They feel remote compared with property or savings.
  • Values are not obvious or accessible without formal requests and there is a belief that they are impossible to value.
  • Defined benefit schemes and State Pensions are complex and poorly understood.
  • They don’t appear to help with immediate or “urgent” issues, such a rehousing or caring for children.
  • There is an inequality between men and women in accruing pension benefits, often due to inequality in pay and time taken out of careers to have and bring up children. Typically, pensions held by men are worth twice the amount of those held by women.
  • There is a perceived unfairness that “hard earned” pension built up over a lifetime career, should not necessarily be shared.
  • There may be a desire for a clean break and parties mistakenly think that claims upon a pension using a pension sharing order, will result in there being an on-going financial tie.

However, when couples consider the reality of the total number of years during a which a pension has been accrued, often many of those years having been during the time that a couple has been married or in a civil partnership, that value can often be really significant. This is particularly the case if the pension has been built in a professional or occupational scheme. In some cases, although pensions are seen as less “tangible” and perhaps illiquid, their values can eclipse the value of the family home or other capital savings.

Fairness in divorce is not just about immediate housing needs. The court’s aim includes considering the parties’ “needs” and that includes their needs into retirement.

Pension Sharing Orders: Process, Timing and Typical Costs

A pension sharing order allows a pension to be divided at the point of divorce and a financial order being made, either by consent or following court proceedings. This means that it does not impact on the ability to achieve a clean break and allows for independence in retirement i.e. one party does not remain beholden to the other party retiring before they can access a share of the pension.

In practical terms:

  • A share of the pension member’s scheme is transferred out and moved into the name of the receiving party.
  • Some pension schemes allow the pension share to remain within the original scheme, whilst other schemes oblige the receiving party to transfer their share to an alternative pension provider.
  • The pension sharing order takes effect 28 days after the Final Order in the divorce, not at the point a financial agreement is reached.
  • Pension scheme administrators then usually have up to four months to implement the share and information about scheme transfer options, timescales and fees will usually be provided with the CEV itself.
  • Most schemes charge an implementation fee, which can range from a few hundred pounds to several thousand. This fee can be shared however, and sometimes taken from the pension pot itself.
  • Pension sharing is usually expressed as a percentage share, rather than a fixed cash figure. This is because pension valuations fluctuate throughout the negotiations and between the point a pension sharing order takes effect and when it is actually implemented by the pension scheme provider.

Offsetting vs Sharing: When Trading Pension for Property Helps or Harms

Some clients may prefer to retain capital assets, such as a home, business assets or cash savings in exchange for some or all of their share of pension. This is known as offsetting.

Offsetting can work well, but it carries risk. Many factors including the underlying benefits of the pension scheme, the tax position of each party, inflation and industry assumptions made when the CEV is calculated and in relation to life expectancy mean that it is not possible to directly compare cash and pensions in terms of their value and on a pound-for-pound basis. The court has a duty to consider both the long and short terms needs of the couple. Property meets immediate needs and for some individuals, they may have many years of working life ahead of then, during which pension and retirement provision can be built up to provide longer term income stability.

Offsetting can work well where:

  • The parties are young and far from retirement.
  • The pension values are modest or easily replaced.
  • The correct offsetting calculations have been obtained by a PODE, explained and understood clearly and that outcome aligns with the priorities and preferences of the parties.

It tends to backfire where:

  • Defined benefit or public‑sector pensions are offset or “exchanged” for other capital assets without expert input.
  • One party has limited future earning capacity.
  • Couples agree a settlement without taking legal advice and therefore the true value of offsetting is often missed.

State Pension and Defined Benefit Schemes: Avoiding Valuation Traps

State Pension and defined benefit schemes can often be undervalued because couples will instinctively compare them to cash or defined contribution schemes. The purpose of the CEV is to provide a “real-time”, present day valuation of the guaranteed future income. The reality is that buying that future income security privately, on the open market, is likely to cost a lot more than the CEV provides for. It is also easy to fall into the trap of looking at pensions as an abstract, inaccessible, future resource and therefore individuals will unintentionally undervalue pensions when compared with property or savings.

For parties who perhaps hold unequal state pension benefits, it is important that they are fairly and accurately considered in the same way all the other assets and pensions are within the negotiations. This is because the UK state pension is inflation linked, government backed and payable for life and is therefore extremely valuable. Individuals who have gaps in National Insurance contributions and therefore, in state pension contributions should take professional advice from a solicitor and PODE, and obtain a calculation to ascertain the lump sum required to bring an individual up to full state pension entitlement. This may be following a career break, child bearing and caring responsibilities or having had periods of working overseas.

Usually when a PODE is instructed, they will be asked to consider equalisation of retirement incomes, at various future retirement ages. This will provide the couple with equivalent and equal income streams at the agreed retirement age. Experts may also be asked to calculate the equalisation of the capital or headline value of the CEV, but this may result in an entirely different pension sharing percentage. Couples should therefore take advice from a solicitor when considering the request for calculations and the basis upon which those calculations are produced and make sure disclosure and evidence as to the extent of those pension benefits is firstly, exchanged between parties and secondly, made available to the PODE in the context of any expert report.

This article was written by Thea Bennun, partner in our Family Law team.