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8 Divorce and separation: The impact on pensions

A reality that many thousands of couples in the UK face each year is divorce or separation.

In 2021 there were over 113,000 divorces in the England and Wales (ONS, 2022). Divorces in Scotland and Northern Ireland add approximately 10,000 more to this number. One in four divorces involve people age over 50 or more.

The emotional impact of divorce is often made worse by the issues around money and sorting out financial affairs, moving forward, so that two separate homes can be funded.

The image is a photo of a middle-aged couple having a meeting with a female adviser. The adviser has a laptop open on a table in front and is addressing the couple (who look unhappy).
Figure 7 Getting advice about the financial consequences of divorce may be necessary.

What does this mean for pensions?

Let’s look at divorce first.

For married couples and those in civil partnerships pension savings (where a pension is yet to be drawn) or pension income (where the pension is already being drawn) should be considered as part of the financial settlement on divorce. There are essentially three common approaches to dividing up the pension assets.

  • Sharing: when this type of settlement is reached the pension savings (and by implication the income these can generate) are split between the divorcing couple. The recipient of pension savings can transfer these to an alternative pension scheme if they wish unless the savings are currently in a public sector scheme.
  • Offsetting: with this arrangement one person keeps their pension savings and/or income if they agree to transfer the financial equivalent to their former partner – for example by giving up their share of the house they previously lived together in.
  • Attachment of earnings: here one person keeps their pension rights but under an attachment order part of the income provided by the pension savings is paid to the other partner. So although the pension savings are not shared at the time of divorce the future pension income the savings provide are. In Scotland an attachment is called ‘earmarking’.

Unlike sharing or offsetting, the potential disadvantage of attachments is that there is still a financial relationship between the divorced couple. This could be problematic if the person responsible for providing the attached earnings doesn’t do this – perhaps due to a change of circumstances. There is also the risk that the person with the pension savings could delay starting their pension leaving their former partner without their share of the income from it.

If a pension income is already being drawn – for example through an annuity on a defined contribution pension scheme – an attachment of earnings may be the only feasible option for splitting pensions.

These arrangements for sharing pension assets do not usually apply to state pensions. One exception to this relates to ‘protected payments’ that are used to top up the pre-2016 ‘old’ state pension and which apply to those whose state pension has been built up under the ‘old’ and ‘new’ state pension schemes.

Splitting pension assets can be complex and tensions can arise in reaching decisions. It is likely (although not always) that one partner will have greater pension assets that the other, so if the assets are shared 50:50, the party holding the greater assets may feel they are being treated unfairly. But if they are not shared 50:50 the party receiving the smaller share is disadvantaged. The complications mean that careful legal advice is necessary with this area of a divorce settlement.

What about separating couples who are not married or in a civil partnership? Unless there is a previously agreed legal arrangement, there is no obligation for either partner to share their pension assets and rights. Assurance of any entitlement to a former partner’s pension assets only come with a legal relationship.

Activity 5 Pensions and the gender gap

Timing: Allow approximately 5 minutes for this activity

Why, on average, are the pensions of women less than those of men when couples divorce?

Discussion

The career breaks and periods of low or part-time earnings incurred by many women during their working lives due to caring responsibilities mean they aren’t able to build-up the level of pension savings and rights that men usually do.

Additionally the average earnings of women are still below those of men in the UK and this also affects the accrual of pension savings.

This situation is, however, changing, helped by legislation on paternity leave and more progressive attitudes by couples towards the sharing of caring responsibilities. Additionally the gender pay gap has narrowed significantly in recent years. In 1997 for all employees the average earnings of women were 27.5% below those of men. By 2020 this gap had shrunk to 15.5%. For full-time employees the gap in 2020 was lower at 7.4%. (ONS, 2020).