Pension Sharing on Divorce

My wife and I are divorcing and looking at how to separate our finances.  I have a final salary pension with my employer and my wife has a contributions one with hers.  Mine is probably worth a lot more than hers.  Can you explain how we can divide our pensions equally, please?

Carl responds

Pensions are often amongst the most valuable assets that a couple have, so can play a hugely important part in a divorce financial settlement.

Pension schemes fall broadly into two categories – Defined Contribution (DC) Schemes and Defined Benefit (DB) Schemes.  DC Schemes are built up through contributions from the member, and their employer for a workplace scheme, plus investment growth on the funds.  DB Schemes are where the value of the entitlements when you retire is based on your length of service and salary (either your final salary or a career average).

Valuing a DC Scheme is relatively simple:  your fund has a monetary value.  It’s more complex for a DB Scheme, but your pension scheme administrators should be able to give you a “Cash Equivalent Value” (CEV).  This is different to obtaining a Cash Equivalent Transfer Value if you were simply thinking about transferring your DB benefits, so you must specify that the CEV is required for a divorce settlement.  You should speak to a financial adviser about this.

Pension Scheme entitlements can be shared between the member and their separating partner, using a Pension Sharing Order from the Courts.  Where a DC scheme is shared, your wife will require a pension plan in her own name to accept the transfer value payment.

With a DB scheme, your wife may be able to become a ‘shadow’ member of the scheme with a pension entitlement.   Alternatively, she may be offered a transfer value to apply to an existing or new pension plan in her own name.  It does not necessarily follow that an equal split of the DB CEV will provide equality of pension benefits.

Your divorce lawyers may suggest that you use a Pensions on Divorce Expert in your settlement negotiations.  This is a specially trained Financial Adviser or Actuary who can help with the valuation and separation of pension assets and make recommendations for a fair outcome.

Any opinions expressed do not constitute advice.