What happens to pensions on divorce?
When you divorce, there are three primary ways pensions are dealt with:
1. Pension sharing orders
Pension sharing orders divide pensions between divorcing couples, either as a percentage or an even split.
The money received from a pension sharing order is called a pension credit. It’s usually calculated as a percentage, although in Scotland it can also be an amount. Pension credits can be transferred to a new or current pension pot.
Pension sharing orders give both parties independent control over their respective pension pots going forward. This is a good example of the clean financial break many look for on divorce.
If you have received a percentage of your ex-partner’s pension from a pension sharing order, you can transfer this into the Best SIPP*.
2. Pension offsetting
Here, the value of a pension is offset against other assets such as your home. So, for example one person could keep the pension while the other is awarded the home.
While pension offsetting delivers a clean financial break, it’s tricky to divide assets equally - and one person may need to build their pension pot from the ground up.
3. Pension attachment or pension earmarking
Both terms mean the same thing. Pension attachment is used in England, Wales and Northern Ireland. Pension earmarking is used in Scotland.
A court order re-directs part or all pension payments to an ex-spouse when the pension pays out.
Unlike the other options, with pension attachment or earmarking, you don’t get a clean financial break on divorce.
What happens to your pension on dissolution of civil partnerships?
You are automatically entitled to all or a portion of a pension (and other assets) on dissolution of a civil partnership. Your pension and other assets are subject to the same rules and options as marriages on divorce.
What happens to your pension if you’re not married?
Unless you have a cohabitation agreement in place you are not automatically entitled to all or a portion of a pension - or any other assets - on divorce. Automatic entitlement is reserved for marriages and civil partnerships.
* SIPPs are not suitable for everyone. If you don’t want to invest across different asset classes or don’t think you will make use of the investment choices that SIPPs give you, then a SIPP might not be right for you. Please note, other taxes may apply when taking your pension income.