Pensions and Divorce: How to Secure Your Retirement Plans

This article is sponsored by PensionBee, a supporter of Peanut and women alike.

There’s no questioning it: separation and divorce bring about huge changes in many parts of your life—including your financial well-being and retirement plans.

It’s a massive upheaval, no matter the road that led there, and it’s easy to overlook the finer details as you adjust your future plans.

One area that can often get lost in the shuffle? Your pension.

Divorce and separation often mean big shifts in income and outgoings, which can impact your pension contributions.

To keep your pension pot healthy and on track, understanding how to navigate this complex terrain is essential.

So, we’re teaming up with PensionBee to help you do just that.

We explore how finances are split in a divorce, how pensions and divorce overlap, and the steps you can take to adjust your pension plans.

In short, we’ve got you.

Let’s dive in.

In this article: 📝

How are finances split in a divorce

How to divide your assets is a huge part of divorce—and not always one that resolves easily.

Typically, in the UK, the general rule for divorce settlements is if a 50/50 split of assets ensures that both parties’ capital needs are met, then it is likely the court will rule to divide the assets in this way.

This is by no means definitive, as circumstances are never the same and as straightforward as it sounds.

Sometimes splitting finances can be a lengthy (read: difficult) process.

Factors like owning your own business, one of you being financially dependent on another, or one being a stay-at-home parent can all complicate the process.

When it comes to pensions and divorce, however, there are five main ways these tend to be split:

1. Pension offsetting

Pension Offsetting means each party uses the value of their pension to offset other assets of similar value, like property.

So, if one of you has a large pension pot, the other may get the family home or another asset of equal value.

It’s intended to keep things simple, giving both of you a clean break but may mean one person could be left with very little retirement savings.

2. Pension sharing order

Another option designed to provide a clean break.

A Pension Sharing Order (PSO) allows one of you to receive a percentage share of the other’s pension pot immediately.

It’s basically a court order that allows couples to divide their pension funds upon divorce but is not available outside of this.

Typically the Court will issue a PSO stating how much of the pension you or your ex-spouse can receive—usually as a percentage.

One of the benefits of a Pension Sharing Order is that both parties are provided for following the divorce proceedings and allows for a clean break financially.

And you also have the option of transferring your money to your own scheme.

However, it may mean a decrease in the pension savings of one spouse, which they may have relied upon to support their retirement income, had the marriage not resulted in divorce.

3. Deferred Pension Sharing

If there’s an age gap between you and your ex-partner, where one is already receiving a pension, in the event of divorce, the younger party can apply for a Deferred Pension Sharing Order.

This essentially means delaying taking your entitled pension until you reach retirement age.

It’s worth noting that this option is not available in Scotland.

4. Deferred Lump sum

This is basically an option that lets you receive a lump sum once your former spouse has retired.

Like Deferred Pension Sharing, it is not available in Scotland.

5. Pensions Attachment Order

Known as Earmarking in Scotland, a Pension Attachment Order means that upon divorce one party receives a portion of the other’s pension benefits once available.

The pension is still under the scheme member’s name, but they must provide their ex-partner with a form of payment once they withdraw it.

And while this allows both of you to avail of retirement funds and a tax-free cash benefit, it denies the ease of a clean break.

It’s a lot to get your head around.

And depending on your unique situation, not every option may be available to you.

So, say you and your former partner are already retired, the pensions can still be split but you cannot share a lump sum.

No matter what your separation or divorce may look like, keeping pensions on the table and closely inspected is vital.

For more information, check out episode 14 of PensionBee’s Pension Confident Podcast, What’s the Impact of your Relationship Status on your Finances.

You can also read the transcript or watch on YouTube.

How does getting divorced affect pension and retirement income?

So, how do separation and divorce affect your pension pot?

It’s a lot to do with changing incomes, the splitting of finances, and a little something called the gender pension gap.

Between maternity leave, reduced hours for childcare, and the gender pay gap, women are often left with fewer retirement funds than men.

PensionBee’s recent research showed that the gender pension gap is as high as 44% in some parts of the UK.

The less women earn, the smaller their pension, which is why many rely on joint finances with their partners to make retirement plans.

Another factor?

Many women are just not aware that they may be entitled to a share of their former spouse’s pension.

And sure, any pension accrued before marriage will not be considered an asset when splitting finances.

But pensions earned after marriage always are—an important distinction to know.

But there can be exceptions.

For example, the longer your marriage or civil partnership, the more likely the pension contributions earned while you were cohabiting may be included as part of your Pension Sharing Order.

Oh, and then there’s the small matter of State Pensions.

How does divorce affect State Pension

So we’ve covered workplace and private pensions, but what about State Pension?

It depends on whether you or your ex-partner are receiving the old or new State Pension.

Put simply, if you reached the State Pension age after April 6th, 2016, divorce does not affect your State Pension.

If you or your ex-partner have already built up extra National Insurance (NI) contributions under the old State Pension system, these can be shared—what’s known as Additional State Pension.

Not everyone receives it, but it’s a notable asset to keep in mind.

Additionally, those who were still married and reached State Pension Age before April 6th, 2016, may also benefit from their former partner’s NI record.

If you’ve taken time out of work for childcare or simply have a lower National Insurance record (for any of the reasons mentioned above), it’s a vital step that can help you secure a higher State Pension.

Next to property, a pension is one of the most valuable assets you own, so getting up close and personal with it is essential to securing you a happy retirement.

Something PensionBee is all too happy to help you with.

How do I protect my pension in a divorce UK?

There’s no other way to slice it: when it comes to pensions and divorce, women tend to be at a disadvantage.

Between being the lower earner and missing out on pension contributions because of maternity leave and childcare, pension confidence is not a given.

And while the imbalance is frustrating, there are ways to protect your pension or, at the very least, better navigate the complex terrain of pensions and divorce:

Reimagine future life plans

Maybe this stirs up a little discomfort—and that’s OK.

Divorce can drastically change the life you had envisioned.

All the more reason to take time out to reimagine your new ideal retirement and how you can make it achievable post-divorce.

You may consider things like changing your home, social circle, or hobbies.

Maybe you’ll want to downsize holidays or tap into a new traveling spirit.

All of these reassessments will play a huge role in the steps that come next.

Review your retirement spending requirements

With your revitalised future vision in hand, the next stop is reviewing your new financial responsibilities.

A change in circumstances is bound to bring a shift in your budget and saving goals.

Now is the time to determine how much you need to live comfortably post-divorce (and still have enough to enjoy the retirement years).

Rethink your retirement age

Yes, part of reassessing your future life plans may also be considering if your intended retirement age is still achievable.

Or even desirable!

This is the season of leaning into change—whether that means scaling back expenses for early retirement or working for longer to ensure you can on your ideal terms.

Reexamine your target pension pot size

Depending on how your finances were split in the divorce settlement, your pension pot could be looking a lot different.

All the more reason to face it head-on and build a cosy relationship with it.

After all, a smaller pot can have a big impact on your retirement age and current expenses.

While a nicely increased pot means a lot more financial flexibility and room to breathe.

No other way around it, tending to your pension pot is essential for fostering financial wellness in your future.

You deserve it.

Reassess your regular contributions

After closely examining your pension pot and redirecting your retirement focus, it’s time to see if your existing contributions have what it takes to get you there.

PensionBee offers a Pension Calculator that can help you get a firm handle on your retirement needs instantly.

Just pop in the basics—ideal retirement age, current pot size, and monthly contributions—and PensionBee’s user-friendly tool can tell you if you’re on track and, if not, how you can be.

There’s no way around it, the best way of protecting your pension in a divorce is getting pension confident (and a little savvy).

Like us, PensionBee is all for pension empowerment.

So, if you’d like more information to get the jump on your financial future post-divorce, check out episode 14 of the PensionBee podcast.

You’re one step closer to getting the best out of your pension and your brand-new chapter.

You got this.

Risk warning: As always with investments, your capital is at risk. The value of your investment can rise or fall, and you could receive back less than you invest. This information should not be considered as financial advice.

About PensionBee

For far too long consumers have struggled to manage their retirement savings. Pensions are often complicated, presenting a significant obstacle for savers wanting to take control of their money. In addition, many of us have no idea what we have saved, or how our pension is being managed.

This is where PensionBee can help. Our technology platform is designed to make it easy for savers to combine their old pensions into one diversified online plan, so they can take the first step towards a happy retirement. We’ve created pension calculators and retirement forecasting tools to help savers plan ahead, so they can build a clearer picture of what they should be contributing to meet their retirement goals. Then, when they reach the age of 55 (57 from 2028), we help our customers make hassle-free withdrawals.