Dividing pensions on divorce: Key considerations

Pensions can often fall into the background during a divorce. With the emotional strain, childcare considerations and more immediate financial pressures, they don’t always get the attention they deserve.

Short-term needs naturally take priority, and the family home is often favoured, particularly where there are concerns around disrupting children. But while the house supports today’s needs, pensions are there to support tomorrow. Achieving a fair and sustainable outcome means balancing short-term priorities against long-term financial security.

Pensions can feel complex, and because access can be many years away, they are sometimes not prioritised. There are multiple ways they can be dealt with during divorce, whether through offsetting, pension sharing or earmarking, and in an increasingly complex tax landscape, understanding how pensions work becomes critical to more informed decisions and achieving a balanced settlement.

Taxation or ‘Net benefit’

When dividing assets, it is critical to assess their value after taxation, rather than simply comparing headline figures. For example:

• pension withdrawals are generally subject to income tax (beyond tax-free allowances)
• property and ISAs may have more favourable tax treatment.

Failing to account for taxation can result in one party receiving a materially lower ‘real’ value than the other.

Death benefits also matter as pensions often include valuable protections, such as:

• lump sum payouts
• survivor’s pensions.

Understanding what happens on death (both before and after retirement) is crucial in evaluating the true value of pension assets. As a minimum, clients should be prompted to review their death benefit nominations and update their Wills to ensure they reflect the change in circumstances.

Disproportionate accrual and career breaks

Pension accrual is rarely equal, and it is common for one party to have built up significantly larger pension savings due to:

• higher earnings
• longer uninterrupted career
• employer contributions.

Conversely, the other party may have experienced career breaks, often for childcare or caregiving responsibilities, which have had an impact on their pension accumulation.

When addressing the dividing of assets, it is important to understand:

• the reasons behind unequal pension accrual
• future earning potential
• the need to redress long-term financial disparity.

This is particularly important where one party faces reduced retirement security as a result of choices made during the marriage.

Rebuilding assets and the value of financial planning

Post-divorce financial planning can be overlooked, but it is critically important. Once assets are divided, both parties may need to rebuild their financial positions, particularly their retirement savings.

A financial planner can add significant value by:

• modelling future income needs and retirement outcomes through cash flow forecasting
• advising on tax-efficient investment strategies
• assessing pension transfer and contribution options
• helping prioritise savings and protection planning.

They can also help clients understand trade-offs, for example, accepting less pension in exchange for liquidity today, and help ensure that decisions are made with long-term objectives in mind.

Conclusion

Dividing pensions on divorce is rarely straightforward. While offsetting remains the most common method due to its simplicity and clean-break nature, pension sharing is an option that, in certain circumstances, may offer a cleaner division of retirement assets, though the most appropriate approach will always depend on the specific facts of each case. Earmarking, meanwhile, has largely fallen out of favour due to its ongoing ties and uncertainties.

Ultimately, achieving a fair settlement requires more than just valuation; it demands a holistic assessment of taxation, death benefits, career history, and future needs. Engaging professional advice, particularly from a financial planner, can support both parties in making more informed decisions and planning for their long-term financial needs.