In a divorce pensions can be one of the biggest assets people have (or even the biggest) but many people put them on the back seat when it comes to working out what happens next. There are understandable reasons for this: unless you are approaching your retirement you are unlikely to be able to access your pension (yes there are rules on potentially taking money from your pensions after the age of 55 but this should only be done in conjunction with financial advice), and you may therefore be more focused on where you’re going to live and how you will pay your bills than whatever happens to you in many years’ time; plus many people are baffled and confused by pensions and we tend not to focus on things we don’t understand.
The idea of this blog is to give you a basic guide to pensions and some things to think about if you’re currently going through a separation.
The basics
Firstly, if you have ever paid into a pension then you have a pension. It doesn’t matter if it’s from a job that you left (many) years ago, that pension will still exist unless it was transferred into a different pension. If you haven’t kept any details then if it was a work pension your previous employer may be able to provide you with details. Alternatively if you remember the name of the company who administered it then you can contact them. A trawl through your emails may also give you some clues if you received information via email.
Secondly, for all pensions that you and your spouse/ ex-spouse (there’s no mechanism to share pensions between partners that weren’t married) have you will need to obtain what’s called a Cash Equivalent Transfer Value (sometimes called the Cash Equivalent). This is the value of the pension fund that you have as at the current time. There may be other pieces of information you will need and these are discussed later in the blog. A statement of potential benefits that tells you how much you are likely to receive from this pension when you retire can also be helpful in looking at what your financial position will be in retirement but you will need the valuation too. These valuations should generally be no more than a year old and the more up to date they are the better. You can’t make an informed decision about whether to claim against your spouse’s pension unless you know how much is worth. If you think you’re not interested in this would you still hold the same view if it was worth £250,000? £500,000? £1,000,000? Further, do you know roughly what income they will receive from this pension in retirement?
Pensions are not all alike
There are different types of pension schemes and the scheme you have will be determined by things like whether the pension scheme was provided by an employer or whether this was a pension you set up yourself. Most people will also be familiar with the state pension.
State pension – this is an amount that you are paid by the government when you retire. Your State Pension amount depends on your National Insurance record. If you have always worked and made National Insurance contributions then you may be entitled to a full state pension. At the time of writing this blog (October 2024) the full state pension is £221.20 per week. You can Check your State Pension forecast to find out how much you could get when you reach State Pension age. It also shows your National Insurance record.
If you did not work for periods of time, or lived abroad and so did not pay National Insurance or you were contracted out of SERPS before 2016 then these things might impact on whether you get the full state pension. As part of your discussions it’s helpful to find out how much you will receive by way of a state pension. It may also be possible for you to claim a state pension based on your spouse’s National Insurance record rather than yours if this would be more beneficial for you. If you’re not sure then make sure you take some advice with regard to this.
Defined contributions pension scheme
These are sometimes referred to as personal pensions or stakeholder pensions. They’re also sometimes called ‘money purchase’ pension schemes too. They can be a workplace pension that’s arranged by your employer, or they can be a private pension that you take out yourself. This might be because you’re self-employed and don’t get a pension from an employer, or because you want to top up other pension provision you have.
Money paid in by you (or your employer) is put into investments (usually managed by people called fund managers whose job it is to get the best return on monies invested in the pension) by the pension provider. The value of your pension pot can go up or down depending on how the investments perform. Whilst this might cause you concern most money invested in pensions is there for the long term so fluctuations are normal. If you have a pensions adviser they may discuss with you your attitude to risk so that they can look at whether to invest monies in high risk funds (where there may be a greater return on the investment but there is a greater risk) or whether to keep the risk more medium to low.
Some schemes move your money into lower-risk investments as you get close to retirement age. You may be able to ask for this if it does not happen automatically. As with any investment, it’s a good idea to keep an eye on how your pension fund is growing and to discuss things regularly with a financial advisor if you have one. That way you can stay on top of whether your pension is growing at a rate you’d like, depending on when you’d like to retire and the level of income you’d like to have. If the scheme is provided by an employer you may have less control over what happens but you can still talk to a pensions adviser so you can arrange further provision if you feel the pension you get from your employer won’t meet your needs in retirement. Your employer may provide access to a pensions adviser.
When you retire the amount you will receive depends on how much has been paid into the pension scheme (by you and your employer if they contribute), how well the investment has performed over time, and how you decide to take the money. You can choose to be paid the money monthly as a regular payment or you can choose to take some of the money as a tax free lump sum when you retire and receive the rest by way of a monthly pension. You can usually take up to 25% of the amount built up in any pension as a tax-free lump sum. The most you can take is currently £268,275. The amount you can take tax free may be more if you’re eligible for a lifetime or protected allowance and you should take specialist advice to find out more.
Defined benefits pension scheme.
This is a pension scheme where the amount you’re paid is based on how many years you’ve been a member of the employer’s scheme and the salary you’ve earned when you leave or retire. You may have also heard these kind of pensions referred to as final salary.
You might have one if you’ve worked for a large employer or in the public sector.
Your employer contributes to the scheme and is responsible for ensuring there’s enough money at the time you retire to pay your pension income.
You can contribute to the scheme too, and, depending on the scheme, this may be a requirement. They differ from defined contributions because the amount you receive is based on the benefits you have accrued (e.g a percentage of your salary) rather than being based on the money that is in the pension fund. For this reason many people consider that a defined benefits scheme with a Cash Equivalent Transfer Value of £100,000 is more valuable than a defined contributions pension scheme with a CETV of £100,000.
To look at it another way (we’re using round figures to make this easier to explain) if your defined benefits pension scheme terms state that you can earn up to 50% of your final salary if you do 25 years’ service and you retire after being there for 25.5 years then you will (in this simple example) be paid £20,000 a year in retirement, if your final salary was £40,000. So the pension fund will pay you £20,000 a year until you die. This could be for approximately 20 to 40 years (if you live to 100 or more) depending on how long you live, and how old you are when you retire (most schemes will stipulate the minimum retirement age). So even if the Cash Equivalent Transfer Value is £325,000 the fund will guarantee paying out £400,000 if you receive £20,000 a year for 20 years.
SIPP or self invested personal pension
These are personal pensions like defined contribution pensions but they allow you to control the specific investments that make up your pension fund. With a SIPP, you choose and manage your own investments or pay an authorised financial adviser to help you. They can offer much wider investment options than other pension types but it is important to have specialist and regulated advice to ensure you understand what you’re doing and to ensure you work within the rules, and are aware of any potential issues that might crop up.
The assets that can be invested in include:
- company shares (UK and overseas)
- collective investments – such as open-ended investment companies (OEICs) and unit trusts
- investment trusts
- property and land – but not most residential property.
This list isn’t exhaustive – different SIPP providers offer different investment options.
You can’t usually use a SIPP to invest in residential property. But it might be possible to invest in commercial property, such as offices.
Understanding the types of pensions that people can have helps you to make informed decisions about pensions as part of your separation. It is always sensible to get some financial advice from an Independent Financial Advisor or Chartered Financial Planner to ensure you are making decisions that are in your best interests financially.
What can we do with pensions when we get divorced
There are four main options you can choose for dealing with your pensions when you get divorced:
- You each keep your own pensions. If you each have similar types of pensions with similar values then you may not feel it’s appropriate to share pensions. Or there may be reasons why you both believe that some or all of the pensions you have are non-matrimonial assets. If you’re not sure then get some advice from a specialist family lawyer.
- Offsetting – this is where one person keeps their pension and the other person gets other assets to offset the pension value. Whilst there can be sound reasons for thinking of this it is important to remember a couple of things:
- Make sure you truly understand the value of the pension you’re not claiming on. This isn’t just about the Cash Equivalent Transfer Value of the pension, it’s also about the type of pension and the benefits your ex-spouse will receive. Make sure you take advice.
- It can be attractive to think that you will keep a house you love and feel secure in instead of seeking a share in a pension you can’t yet claim. But think about (and take some advice on) how you will make ends meet in retirement. If you’re going to be forced to sell the house because you can’t afford to keep it when you retire, then it won’t give you security forever. It’s not fun to be sat in a house that needs repairs and not be able to afford to do those repairs. Plus if your ex has had time to save some money to buy a house then they may have a permanent home and a good pension. If that’s the case how will you feel about that?
- Ear marking or pension attachment order – this tends to only be used in certain circumstances. The pension being shared is retained by the person whose pension it is and an agreed share is paid to the other person every time there is a pension payment (usually monthly but this could be a lump sum). Payments will only be made once the person whose pension it is becomes eligible. If the person with the pension dies then the other person will usually stop receiving any money from this pension.
- Pension Sharing Order – this is where a percentage of one person’s pension is removed from their pension and paid into a pension in the other person’s name. Depending on the terms of the pension scheme the person gaining the pension benefit would either have to set up a pension within the pension scheme the benefit was coming from, or it would have to be transferred out of the scheme to a different scheme. The terms of the pension scheme will tell you what needs to be done in each case and should set out the costs of doing this. Once the pension credit is transferred into a pension in the name of the pension who is receiving it, it becomes their pension and will always be their pension – even when their ex-spouse dies.
Pension sharing or pension attachment orders can only be made by a court and can’t be made informally between separating spouses.
When you’re discussing what happens next following a decision to separate then it’s important to think about:
- What pensions do you each have? What are their Cash Equivalent Transfer Values and what type of schemes are they? You will need to ask for the information if you don’t have a statement with this information that’s less than a year old. Make sure this is done for each pension that either of you have. You can just contact the pension provide and ask for this and they will provide you with information on how to get this. Depending on the pension scheme it can take some time.
- Do you have questions about the pensions your ex has disclosed? Do they cover their whole employment history? Did you remember they have an additional pension that hasn’t been disclosed? Sometimes people forget what pensions they have (especially if they have one from a previous position they don’t pay into any more) so always ask the questions.
- Do you know where to go to get advice on pensions? Your lawyer will be able to advise you about the questions to ask but you should also consider taking financial advice. If you’re not sure how to find someone then why not ask friends and family or your lawyer or mediator.
- It’s hard to talk about pensions and it can become bamboozling technical, so it can help to think about some general principles. Do you want to make sure you both have the same income in retirement? Do you want to make sure you both have pension funds the same size? Remember that just because your funds are the same size it doesn’t mean you will get equal income or benefit from them. Do you feel you have sufficient time before you both retire to improve your pension provision? Is there an age difference between you in which case one person may have more time to pay into a pension. These are all things to take into account and to discuss together (either between yourselves or with assistance from a mediator, or your lawyers).
Where you want to do something that requires calculations to be made about your pensions then it helps to involve an actuary. These are pension experts who can also make complicated calculations such as how to equalise your income in retirement from the pensions you have. They can also factor in things like paying the lowest charges if you’re going to share pensions. They will also factor in the different benefit that different pensions schemes have. If you have substantial pensions (the rule of thumb is pensions with a total value of over £100,000) then it’s even more important that you get specialist financial advice to make sure you are both getting the best value from decisions you make about pensions.
If you feel you need greater detail on understanding pensions then have a look at this guide.
