3 practical ways to divide pension savings and protect your future on divorce

Divorce is an expensive business and record settlements often make the headlines.

A prime example of the levels of wealth that can be involved is the divorce of Sheikh Mohammed bin Rashid al-Maktoum – the ruler of Dubai – who was ordered to pay his ex-wife and two children a record-breaking £500 million as part of their settlement. 

While your divorce settlement may not run into multi-millions, an important, but often overlooked, aspect of separation and dividing assets are pension savings.

52% of women don’t know their rights or understand how pension rules work on divorce

According to a report published by inews, more than half (52%) of women don't understand the rules surrounding their partner's pension. Not being aware of the legalities of dividing your assets, especially where pensions are concerned, could prove costly.

With solicitors often seeing an uptick in divorce enquiries in January, it's useful to understand your rights. So, read on for some of the key things to consider when it comes to dividing your pension savings if you’re thinking about getting divorced.

Pension savings could be worth more than the marital home

Generally, the family home is often thought to be the largest and most significant marital asset; chances are, it could be your pension pots.

In 2022, the Office for National Statistics (ONS) reported that private pensions often represent a greater share of total household wealth. Indeed, during the last 14 years, the proportion of wealth held in private pensions has increased, making them the largest component of total wealth.

Splitting a pension could help provide the lifestyle you want in later life, but worrying research from Legal & General revealed that 24% of divorcees waive their rights to an ex-spouse’s retirement pot.

The biggest reason for this is perhaps because while many people seek legal advice during divorce, they don't always think about consulting a financial planner. This means that some divorcees may not understand how much their ex-spouse’s pension pot is worth, or how splitting it could ensure their financial security.

We can help you assess the pension savings involved, and understand how best to divide the assets fairly between you and your ex-spouse.

3 main ways pensions can be split

There are three methods that divorcing couples can use to divide pension savings:

1. Offsetting

As the name suggests, with this method, the value of any pension is offset against other assets.

For example, if you share a property worth £300,000 and there’s a pension that’s also worth £300,000, one of you might choose to keep the pension while the other kept the property.

There can be downsides to this.

Owning a property may require you to sell to generate an income in later life. Plus, there may be significant costs to maintain a property, whereas pension fees are usually low.

Unlike property, pensions also come with significant tax benefits. You receive tax relief on contributions and a pension will typically fall outside your estate for Inheritance Tax purposes, too.

2. Earmarking

Earmarking – sometimes referred to as a “pensions attachment order” – allows the person without the pension to receive an income or a lump sum from the pot in the future.

In effect, the pension benefits are “earmarked” for the benefit of one party in years to come.

A court can also order that some or all of any survivor pension and lump sum death benefits must be paid to the other partner if the pension scheme member dies.

As you might imagine, the biggest disadvantage of this approach is that the party without the pension must wait until their ex-spouse retires or dies before they receive benefits.

The other downside is that the recipient of the “earmarked” benefits will have no control over the investment decisions their ex-partner may take.

3. Pension sharing

Here, pension benefits are split with a share of the savings transferred into the receiving partner’s name. This ensures a clean break as, on divorce, both parties know what proportion of the pension they will receive or keep.

Understanding which method might be best for you and your ex

With different considerations and possible approaches you could take to split a pension, we can help you understand what would suit your immediate and future needs.

Additionally, should the pension split fail to provide adequate funds for you to enjoy the lifestyle you want in retirement, we can also help you work towards getting back on track.

3 practical ways to get your retirement savings back on track

Three steps we would encourage you to consider if your pension savings need a boost include:

1. Boost your pension contributions

Typically, subject to certain annual limits, the money that you contribute to a pension receives tax relief.

So, for a basic-rate taxpayer, every £100 you contribute could cost you just £80. Meanwhile, a £100 contribution could cost £60 for a higher-rate taxpayer and £55 for an additional-rate taxpayer. The beauty of this is that you might find that you're able to boost your pension pot much more quickly than you imagined.

Read more: What do your pension contributions mean for you?

2. Use carry forward

If you have recently received a lump sum divorce settlement or inheritance, “carry forward” might be a good way to boost your pension pot.

This could allow you to receive tax relief on lump sum contributions that exceed your annual limits. However, it’s wise to consult your planner before proceeding to make sure you avoid an unwanted tax charge.

3. Track down lost pensions

According to PensionsAge, an estimated 1.6 million retirement funds have been lost or are dormant in the UK. This amounts to a total of £37 billion.

If this includes pensions that belong to you, finding them could provide your retirement fund with the boost it needs.

Get in touch

If you are considering divorce, we can help ensure you’re financially secure both now and in the future. Likewise, if you know someone who’s divorcing and could benefit from a conversation with us, we’d be happy to help them understand their financial situation and explain what they should consider.

Email info@aspirafp.co.uk or call us on 0800 048 0150.

Please note

The information contained in this article is based on the opinion of Aspira and does not constitute financial advice or a recommendation to any investment or retirement strategy.

You should seek independent financial advice before embarking on any course of action. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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