There’s so much to consider when you get divorced, from splitting the family home, to other assets like furniture and cars. And that’s not to mention the emotional impact of divorce too. But it’s important not to forget about savings and investments, including pensions.
We take a closer look at the important things to consider when it comes to pensions, retirement and divorce.
The importance of discussing pensions
Myron Jobson, Senior Personal Finance Analyst at interactive investor, emphasises that the process of untangling two lives is rarely straightforward and often brings emotional and financial challenges. Pensions are frequently overlooked, despite being a significant financial asset. Research reveals that the majority of divorcing couples don’t even discuss pensions, leading many – particularly women – to miss out on future income that should have been theirs.
One stark finding from interactive investor’s Great British Retirement Survey 2023, which surveyed more than 9,000 UK savers, is that two-thirds (67%) of divorcees did not discuss pensions during their divorce proceedings with 75% of divorced women admitting they had not discussed pensions as part of their settlement, compared to 56% of divorced men.
The financial impact of excluding pensions
Using an initial pension value of £100,000 at age 40 and assuming retirement at 68 (the proposed state pension age for those born after 5 April 1978), a spouse could forgo a financial asset worth over £196,000 if the pension is excluded from the divorce settlement, assuming annual growth of 5% (net of fees) over the 28-year period. If the pension grows by 7% annually, the shared pot could rise to over £332,000. The calculations also assume the couple agrees to a pension-sharing arrangement, splitting the pension 50:50.
The financial impact is even more significant with larger initial pension values. For example, a £200,000 pension could grow to over £392,000 at 5% annual growth, or nearly £665,000 at 7% annual growth over the same period.
Value of 50% pension pot after 28 years
| Annual pot growth | Initial pot of £50k | Initial pot of £100k | Initial pot of £200k |
|---|---|---|---|
| 3% | £57,198 | £114,396 | £228,792 |
| 5% | £98,003 | £196,006 | £392,012 |
| 7% | £166,220 | £332,441 | £664,883 |
Source: interactive investor. Assumes divorce at 40 and retirement at 68, value based on 50% of pension pot at divorce, investment growth net of fees.
Different approaches to dividing pensions during divorce
There are three main ways to tackle pensions in a divorce:
- Pension sharingThe most direct option, this involves splitting the pension between both parties. A court order divides the pension, and a portion is legally transferred to the ex-spouse, creating a separate pension pot in their name. This allows the ex-spouse independent control over their pension, ensuring a clean financial break. There are no implications if either party remarries or dies.
- Pension attachment order (earmarking)This option entitles one party to receive a share of the pension benefits when the other begins drawing their pension. Payments are made to the ex-spouse (either directly from the pension or via the pension-holder) as part of their retirement income. However, there is no clean break with this arrangement, and payments depend on the pension-holder’s retirement plans. Payments cease if the receiving spouse remarries or the pension-holder dies.
- Pension offsettingThis involves offsetting the value of the pension against other assets, such as property or savings. For example, one spouse might retain the pension while the other takes a larger share of the house. While this approach provides a clean break and addresses immediate housing concerns, it can be challenging to strike a fair balance. One party may end up with little or no pension provision.
Divorce is a very significant life event – and can quickly become very complex and stressful. According to Myron Jobson: ‘Pension considerations in divorce are complex and need careful evaluation. Offsetting pensions against other assets may suit some couples, while splitting the pension or earmarking future payouts may work for others. These issues become even more intricate when either party has been married before. It is worth consulting a solicitor to understand the legal and financial implications of pension division.’
Having an adviser on hand can help provide important clarity, peace of mind and emotional support at this time. They can also help make the big decisions easier by explaining all of your options and giving you the confidence that you’re making the right choices in the best and most tax-efficient way for you.
Additional considerations when splitting pensions
- Know the total value: It’s crucial to know the total value of your and your ex-partner’s pension benefits to ensure a fair split.
- Regional differences: In Scotland, only pension benefits built up during the marriage are treated as marital assets. In the rest of the UK, all pension benefits are generally viewed as marital assets. And in Scotland you don’t always need a pension sharing order to split a pension, it can also be done by a simple written agreement between the parties involved.
- Tax implications: Different ways of dividing pension benefits have different tax implications. It’s a good idea to speak to your pension provider or a financial adviser to understand these implications and ensure you don’t end up paying more tax than you need to.
Planning for your future
If you’re divorced or separated, it’s important to give careful thought to how you’ll support yourself in the years ahead, including in retirement. Living a single life is generally more expensive than sharing costs.
A key life event, like divorce, is also an important time to make sure you’ve updated your financial documentation. That includes pension death benefit nominations, any death-in-service entitlement you have with your employer, insurance policies that pay out on your death, plus your will and powers of attorney. You’ll also need to review any trust arrangements you have in place to ensure they meet your needs post-divorce.
And if you don’t already have documentation like this, it’s a good opportunity to put it in place and take control of your financial future. It’s particularly important if you have minor children as arrangements may need to be put in place in the Will to cover off who will look after the children if one of the parents doesn’t have access rights.
We’re here to help
Understanding your options and making informed decisions can help secure your financial future post-divorce. If you have any questions or concerns about divorce proceedings and how they may affect you, or if you’d like a bit more clarity get in touch with your abrdn financial planner. Find out how abrdn's financial planning services could help.
The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in. Tax rules can always change in the future. Your own circumstances and where you live in the UK could have an impact on tax treatment. Information is based on abrdn’s understanding in January 2025.
abrdn Financial Planning and Advice Ltd is registered in England (01447544) at 280 Bishopsgate, London EC2M 4AG and authorised and regulated by the Financial Conduct Authority.
- ii Great British Retirement Survey - iiOpens in new window
- Assumptions by interactive investor