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We spend many years building up our pensions and they are normally critical to our retirement planning, offering financial security for the future. So, it is understandable that people can feel very protective over their pensions and, during a divorce, be really concerned about what is going to happen to the pension pot they have built.
If you are facing divorce and are worried about what is going to happen to your pension, it is important to understand your rights and those of your spouse, as well as the options you can use to protect your pension.
This is also worth thinking about in advance if you are getting married or are currently married and want to know how your pension would be treated if your marriage ever ended in divorce.
In this blog, we will cover the following key issues surrounding pensions and divorce:
- How pensions are treated in divorce
- How much of your pension can your spouse claim?
- Using a prenuptial agreement to protect your pension
- How pension offsetting can protect your pension in divorce
Please note, the information in this blog should not be taken as legal advice. For specific help with pensions for married couples or pensions and divorce, please speak to one of our Family Law team by calling us on 01689 887 887.
How pensions are treated in divorce
The first thing to understand about pensions and divorce is that they will normally be considered as part of your assets when working out the division of finances in divorce. This does not necessarily mean that your spouse will be entitled to half of your pension or even necessarily that your pension will be split in divorce, but it does mean that the value of your pension will be considered, either by a judge or by you or your legal representatives when trying to ascertain what a reasonable division of assets might entail.
You will need to disclose the value of your pensions in divorce. You will need to provide a Cash Equivalent Value for your pension, these can be obtained from your provider upon request. Alternatively, you can often simply use your annual pension statement from your provider as the basis for how much your pension is currently worth, but independent verification could potentially be needed depending on the circumstances.
How much of your pension can your spouse claim?
Exactly how much of your pension your spouse might be able to claim will vary based on the specifics of your situation, including their reasonable needs and what other assets are available to be divided. You should seek expert advice on divorce pension rights so you know exactly what you and your spouse may be entitled to.
If you are agreeing a divorce settlement voluntarily with your spouse, you will be able to decide between you how much, if any, of your pension they will receive. If you need to apply to a court to decide on the division of finances, then it will make its own determination about what is a fair split and how your pension should factor into this.
Where protecting your pension is a priority for you, it is therefore normally in your interests to negotiate a financial settlement with your spouse rather than relying on the courts. This is because you can retain more control over exactly how your assets are split. It is a good idea to get expert advice on dealing with pensions in divorce settlements at an early stage of divorce proceedings.
Using a prenuptial agreement to protect your pension
If you are not yet married and are keen to protect your pension, then you could consider entering into a prenuptial agreement or ‘prenup’. This is a legal agreement between you and your spouse setting out exactly how your assets should be divided if you were to one day divorce. This could include specific provision for pensions in divorce e.g., that you should retain your pension.
Should you decide to go down this route, then an important point to remember is that prenups are not automatically legally binding under the law in England and Wales. A prenuptial agreement will only carry weight if it is properly prepared and signed. You should, therefore, have a family law specialist with specific experience in prenups work with you to agree the terms with your spouse, then draft the agreement. Your spouse will also need to have independent legal advice before signing.
You should keep in mind that a prenuptial agreement has to be fair to both parties and factor in any children you may have now or in the future. If your spouse decided to challenge the prenup in court during a divorce, the court can choose to set the agreement aside if it feels it is unfair to your spouse or would not adequately provide for the needs of any children. You must, therefore, make sure the agreement is fair and, if your circumstances change, you may need to update the agreement with a ‘postnuptial agreement’.
A postnuptial agreement or ‘postnup’ is like a prenup, except you can make it once you are already married. Again, this agreement could provide specific terms for how your pension should be treated in a divorce. You can make a postnup if you did not have a prenup or, as stated above, if you had a prenup but your circumstances have changed in a way that means the existing agreement is no longer fair. This can provide useful clarity on pensions for married couples.
How pension offsetting can protect your pension in divorce
Where you are going through a divorce and in the absence of a nuptial agreement dealing with your pension assets, then ‘pension offsetting’ could be the best option to safeguard your pension.
Pension offsetting can see you retaining your whole pension as part of your financial settlement in exchange for allowing your spouse to keep other assets of equivalent value. A common scenario would be that one spouse keeps their pension while the other keeps the family home. This can allow you to reach a fair division of finances while not having to share your pension pot or income.
Alternatives to pension offsetting include pension sharing, where your spouse would be given a lump sum from your pension pot to start their own pension, and pension earmarking, where they would receive an agreed percentage of your pension income on an ongoing basis. Both of these options involve giving up some of your pension wealth or income, so may be less suitable if protecting your pension is a priority.
If you or your spouse hold substantial pension assets, either your or your spouse’s legal representative will likely recommend that actuarial report is produced to help inform you as to the true value of the matrimonial pension pot. These reports can also advise on the required pension sharing order to achieve capital and/or income equalisation upon retirement, advise as to suitable offsetting, and if necessary, exclude pension assets that should not be included in the matrimonial pot (e.g., they were accrued before the marriage).
Speak to our solicitors in Orpington, Kent about divorce and pensions
If you need help with how to protect your pension or any other aspects of division of assets in divorce, we can provide clear, practical advice. To speak to one of our Family Law team, call us on 01689 887 887.