Why Pensions Are Key in Financial Settlements

Private and company pensions may not be the most exciting of topics, but in terms of assets, their value can be considerable. LGFL Director Anne Leiper explains why factoring in pensions is crucial to a balanced financial settlement that provides for you and your family long after your divorce.

Accounting for pensions in divorce

Pensions are a major factor that need to be fully accounted for in divorce financial settlements. Under the requirement for ‘full and frank disclosure’ during divorce, both parties should declare the value of all their assets including pensions.

As we described in a previous article on pensions and divorce:

“Both parties are legally obliged to declare all their assets, and pensions must be accounted for in a divorce settlement. A cash equivalent transfer value needs to be provided by the pension company in respect of every pension.”

Pensions are essentially the funding for your long-term needs long after the divorce is settled. The aim of any divorce financial settlement is to “equalise pension income as at the date of retirement”, so both of you benefit from the same amount of income, assuming you retire on an agreed date.

As a divorce lawyer dealing with many high-net-worth clients in divorce, one of my primary roles is ensure that our clients have up to date cash equivalent valuations for both their pensions and their spouse’s too.

Why pensions are so valuable

Over our lifetime, many of us will invest a significant amount of money into our pensions. You might:

Contribute through your salary to a work pension scheme.
Contribute direct to one of more private pensions.
Your employer will contribute too.

All this is in addition to your contributions towards your individual State Pension through NI payments.

That all adds up. According to the latest stats from the ONS:

“The combined market value of private sector defined contribution and public sector defined benefit and hybrid pension schemes (was) £830 billion between on 31 March 2024.”

In addition, from 2022 to 2023 alone, £12.8 billion of individual contributions were made to personal pensions.

Mind the gender pension gap

If you have worked in a senior role for a large part of your career, your accrued pension pot could run into millions. You may also have several pensions from various employers over your career.
Equally, if you took time out from your career to raise your children, you may not have an sizeable company or any private pension to draw on at all.

This has created the so-called ‘gender pension gap’ with national statistics showing sizeable differences in retirement income / retirement wealth for men and women.

According to Legal and General, women start out with a 16% difference in pension size right from the outset. From then on:

“At every age bracket women are shown to have lower pension pot sizes. By the time they reach retirement, the average size of a man's pension pot is twice that of a woman’s.”

Concerned about your pension in a divorce financial settlement?

Contact us for early legal advice and to discuss financial settlements that can sustain you and your family. You should also consult your financial advisor and/or accountant as there will be tax implications for you both.

Who gets the house?

According to Hargreaves Lansdown, almost 50% of couples in the South East are on track to have an income in retirement of around £34,000. That equates to an average pension wealth of £155,100 in 2023. By contrast, the average house price in the region in 2023 was £388,873.

Therefore it can look a better deal on paper to take the house, as it is worth more. However, there are important factors to take into consideration.

Since financial settlements are based on the value of their assets at the time of divorce, a couple might just compare the higher earner’s pension and the value of the family home. If on paper they are much the same, divorcing spouses may be tempted to just “swap” one for the other. One gets the house, one gets/keeps the pension.

This approach misses the fundamental impact of pension as an income in retirement as opposed to the cash value of the family home.

A pension will continue to grow in value every day, and can provide a comfortable income for 30+ years of retirement.
A house may increase in value, but the ‘house spouse’ will need to fund its running costs, repairs and improvements. The house owner can also only access the full value of the capital in the house when they sell it.

The main message here is that

“Pensions are valuable assets and specialist advice is needed to consider them.”

Pension Sharing Orders

Once you have reached your financial agreement, a court order known as a pension sharing order will be required so your pension company can actually divide up a pension.

“A court seals this order (makes it binding) and that is sent to your pension company, along with your divorce final order. Only then will the pension company be able to split up a pension into one for you, and one for your ex-partner.”

This order remains in place regardless of how your situations may change, such as remarrying, or if your ex-spouse dies.

Once the order is made, the pension provider will require information on what you want to do with your share. This is known as your pension credit.

“The pension provider has up to four months to implement or carry out the order from the time when they receive all the necessary information … This four-month timeframe will only begin when the scheme has everything they need to implement the pension sharing order.”

Again, you should seek advice from your financial advisor, accountant and/or pensions professional when deciding how best to use your pension credit.

Divorce and pensions with LGFL

As family lawyers, we can help with early legal advice to help you understand the process and requirements for getting your financial settlement right first time. We also strongly advise you talk to your financial advisor and accountant as well, as we’ll need their help to ensure full and frank disclosure to the court.