When you are negotiating a divorce settlement with your spouse, understanding the legal framework can be helpful. If you can't reach an agreement and the matter goes to court, a judge will decide how your assets, including your pensions, should be divided, which will be based on established legal principles.
Even if your case doesn't go to a final hearing, it can help to be clear on the legal principles to allow you to negotiate a fair financial settlement out of court, because both parties and their lawyers will be considering what a court would likely order if the case went to a hearing.
The article explains the law governing financial settlements, including pensions in England and Wales, the factors that influence decisions, and the principles courts apply when dividing pensions.
The Matrimonial Causes Act 1973
The main law governing financial matters on divorce is the Matrimonial Causes Act 1973. This Act sets out the factors the court must consider when deciding how to divide assets between divorcing spouses.
It's worth noting that the law in Scotland and Northern Ireland is different, though the principles are broadly similar.
The Matrimonial Causes Act gives the court broad discretion and considerable flexibility to make orders that are appropriate in each individual case. This flexibility can be beneficial because it allows the court to tailor the outcome to your specific circumstances. However, it also means the outcomes can be harder to predict.
The Section 25 factors
Section 25 of the Matrimonial Causes Act 1973 sets out the factors the court must consider when deciding how to divide assets. The court must consider all the circumstances of the case, giving first consideration to the welfare of any children under 18.
The specific factors the court must consider are:
The financial resources of each party
The court looks at what each party has now and what they're likely to have in the foreseeable future. This includes not just current income and assets, but also potential future earnings.
For pensions, this means the court considers the current value of all pensions, as well as the likelihood of future pension accrual.
This becomes important in some cases more than others. For example, if one party is 35 and continuing to build up a substantial pension whilst the other party is 55 and unlikely to build up any further pension provision, this affects how the existing pensions should be divided.
The financial responsibilities of each party
The court considers what each party needs, both now and in the foreseeable future. For pensions, this includes the need for income in retirement.
If one party has no pension provision and no prospect of building any up before their retirement, they have a significant need for a share of the other party's pension. If both parties have reasonable pension provisions, the needs factor might carry less weight.
The standard of living enjoyed by the family
The court also considers the family's standard of living during the marriage. The aim is for both parties to maintain a reasonable standard of living after the divorce, although this isn't always possible when resources are limited.
For pensions, this means considering what income both parties will need in retirement to maintain a reasonable standard of living, which is comparable to what they would have had if the marriage had continued.
The age of each party and the duration of the marriage
The length of the marriage is important. In longer marriages, the starting point is often equal sharing of matrimonial assets, including pensions. In shorter marriages, the court may focus more on needs rather than equal sharing.
The parties' ages also matter. If both parties are young and have many working years ahead of them, they may have the opportunity to rebuild their pension provision. If one or both parties are close to retirement, there's little opportunity to build additional pension savings, making the division of existing pensions more critical.
Any physical or mental disability of either party
If either party has a disability that affects their ability to work or that creates additional financial needs, the court also takes this into account. This might affect how pensions are divided, particularly if one party has greater needs due to disability.
The contributions of each party
The court recognises that contributions to the family aren't just financial. If one party stayed at home to raise the children while the other worked and built up a pension, both contributions have value.
This is why the argument "it's my pension because I earned it" doesn't work in law. The court recognises that the person who stayed at home enabled the other to work and build up the pension. Both parties' contributions enabled the pension to be accumulated, so both should benefit from it.
Contributions include looking after the home, caring for the family, and any other contributions to the family's welfare. These non-financial contributions are given equal weight to financial contributions.
The conduct of each party
The court only considers conduct if it would be unfair to disregard it.
Conduct that might be relevant includes serious financial misconduct, such as deliberately wasting matrimonial assets or hiding assets. In pension terms, intentionally failing to disclose a pension or purposely undervaluing it would be relevant conduct that the court would take very seriously.
However, ordinary marital conduct, including who was responsible for the breakdown of the marriage, is not relevant to financial settlements in the vast majority of cases.
The value of any benefit
This specifically includes pension benefits. The court must consider which pension benefits either party will lose the opportunity to acquire as a result of the divorce.
For example, if you divorce, you might lose the chance to inherit a widow's or widower's pension from your spouse's pension scheme. The court can take this into account when deciding how to divide assets.
The three guiding principles
The courts have developed three guiding principles that help judges apply the Section 25 factors. These principles, which stem from the 2006 cases Miller v Miller and McFarlane v McFarlane, are needs, sharing, and compensation.
The needs principle
The needs principle focuses on what each party requires for housing, income, and other essentials, both now and in retirement. Meeting needs is usually the first priority, particularly when resources are limited.
For pensions, the needs principle means ensuring both parties have adequate income in retirement. If one party has no pension provision, they clearly need a share of the other party's pension to provide retirement income.
In cases where resources are limited, needs may be the primary or only consideration. The court focuses on ensuring both parties can meet their basic needs rather than on achieving equal sharing of assets.
In cases where resources are more substantial, the court can go beyond basic needs and consider the sharing principle.
The sharing principle
The sharing principle says that assets built up during the marriage should usually be shared, particularly in longer marriages. This reflects the view that marriage is a partnership in which both parties contribute, whether financially or through other roles.
For pensions built up during the marriage, the starting point is often that they should be shared equally. This doesn't necessarily mean a 50/50 split of every pension, but rather that the overall division of assets should result in both parties having roughly equal assets (including pension assets) if this is fair in the circumstances.
The compensation principle
The compensation principle recognises that sometimes one party has made sacrifices for the family that have affected their earning capacity or pension provision. If you gave up a career to raise children, you may have far smaller pension savings than you would otherwise have had.
The compensation principle says you should not be financially disadvantaged by having made these contributions to the family. The court can make orders that compensate for the financial disadvantage you've suffered.
In pension terms, this might mean you receive a larger share of the pension to compensate for the pension provision you would have had if you had continued working throughout the marriage.
How these principles apply to pensions
When considering pensions specifically, courts typically approach the matter as follows:
Pensions are matrimonial assets
Pensions built up during the marriage are matrimonial assets to be divided, just like the house or savings. The starting point, particularly in longer marriages, is often equal sharing.
Although, as stated, this doesn't necessarily mean every pension is split 50/50. The court looks at the overall division of all assets. If one party keeps more of the house, the other might receive a larger share of the pensions to offset this.
Pensions built up before marriage
In shorter marriages, the court may distinguish between pension built up before the marriage and pension built up during the marriage. Pension accrued before the marriage might be treated differently from pension accrued during the marriage.
However, in longer marriages (typically 15 or 20 years or more), the court usually considers all assets regardless of when they were acquired. After a long marriage, the origin of assets becomes less relevant.
Both parties should have adequate provisions
Courts recognise that both parties need income in retirement, not just capital now. This is why pension sharing is often preferred over pension offsetting. The court wants to ensure both parties will have adequate pension income in their later years.
If one party has substantial pension provision and the other has little or none, the court will usually order that pensions be shared to redress this imbalance.
The value of different types of pension
Courts know that defined benefit pensions, particularly public sector pensions, may be worth more than their Cash Equivalent Transfer Value suggests. Judges are increasingly willing to consider expert evidence from Pension On Divorce Experts about the true value of pensions.
If there's evidence that a CETV substantially undervalues a pension, the court can take this into account when deciding what share should be transferred or whether offsetting arrangements are genuinely fair.
Pension Sharing Orders
When the court decides to make a Pension Sharing Order, it must determine which pension or pensions should be transferred, and by what percentage.
The court has complete discretion about what percentage to order. It doesn't have to be 50%, though this is often the starting point in longer marriages where sharing is the primary principle.
The court can order the sharing of only one party's pension, or both parties' pensions (for example, each party might receive 30% of the other's pension if both have significant pension provisions but one has more than the other).
The court will consider expert evidence about pension values, particularly for defined benefit pensions. If a Pension On Divorce Expert has provided a report explaining that a CETV undervalues a pension, the court can take this into account when deciding what percentage to order.
The court aims to achieve a fair outcome, taking into account all the circumstances of the case and all the Section 25 factors.
When might the court depart from equal sharing?
Whilst equal sharing is often the starting point, there are circumstances where the court might depart from equality:
Short marriages
In marriages of less than about 5 years, particularly where there are no children, the court may focus more on needs than on sharing. Each party might essentially keep what they brought into the marriage or what they earned during it, with adjustments made to meet any needs.
Non-matrimonial property
The assets that are acquired before the marriage, inherited during the marriage, or received as gifts might be treated as non-matrimonial property. In shorter marriages or where resources are substantial, the court may distinguish between matrimonial and non-matrimonial property.
However, in longer marriages or where non-matrimonial property has become mingled with matrimonial property, this distinction often breaks down.
Unequal contributions
Very rarely, if one party has made exceptional contributions that dwarf the other party's contributions, the court might depart from equality. However, this is extremely rare. Normal differences in earning capacity or in contributions to the family don't justify unequal sharing.
Needs of the parties
If one party has significantly greater needs than the other (for example, due to disability or caring responsibilities), the court might give them a larger share to meet those needs.
Pension offsetting
Courts can approve pension offsetting arrangements, but they approach them with caution, particularly when the person with less or no pension provision is agreeing to take other assets instead of a pension share.
The court will want to be satisfied that:
- The person accepting offsetting understands what they're giving up – particularly that they're giving up guaranteed pension income in exchange for capital assets.
- The offset is genuinely fair and equivalent. If a public sector pension with a CETV of £300,000 is offset against £300,000 of other assets, the court may question whether this is genuinely equivalent, given that the pension might provide income worth far more than the CETV suggests.
- Both parties have received proper advice, including, if appropriate, from pension specialists.
- The person accepting offsetting will have adequate income in retirement. The court doesn't want to approve arrangements that will leave one party in poverty in their old age.
If the court has concerns that an offsetting arrangement isn't fair or that one party hasn't properly understood the implications, it can refuse to approve it and order pension sharing instead.
What if you can't agree?
If you and your spouse can't agree on how pensions should be dealt with, the matter will ultimately be decided by a judge at a final hearing. Both parties can present evidence, including expert evidence about pension values.
The judge will consider all the evidence, apply the Section 25 factors and the guiding principles, and make whatever order they think is fair in the circumstances.
However, court proceedings are expensive, stressful, and time-consuming. Most cases settle before reaching a final hearing, often because both parties recognise that the court would likely order something similar to what's being proposed in negotiations.
Understanding how the court would approach pensions in your case helps you negotiate a reasonable settlement without the need for a hearing. If you know that a court would likely order pension sharing in your circumstances, there's less point in holding out for an agreement where you keep all your pension.
The importance of proper disclosure
None of these principles can be applied fairly without full and frank disclosure of all assets, including all pensions. The court can only make fair orders if it knows what assets exist and what they're worth.
If you fail to disclose pensions or provide inaccurate valuations, the court can:
- Draw adverse inferences, meaning the court assumes the hidden or undervalued asset is more valuable than you're claiming.
- Set aside the order, meaning even years after the divorce is finalised, the court can reopen the case and make new orders if it discovers you didn't make full disclosure.
- Make orders for costs against you, meaning you might have to pay your spouse's legal costs as well as your own.
- Non-disclosure is taken extremely seriously. It's not worth the risk. Make full and frank disclosure of all your financial circumstances, including all pensions.
Getting the outcome you want
If you're negotiating with your spouse, you can point to these principles to explain why your proposed settlement is fair.
If your spouse is being unreasonable (for example, insisting they should keep all their pension because they earned it), understanding the law helps you explain why a court wouldn't accept that position.
However, the law gives courts broad discretion, making outcomes difficult to predict with certainty. Two different judges might reach slightly different conclusions on the same facts, though both would be working within the same legal framework.
This is why most cases settle rather than going to a final hearing.
This information is for guidance purposes only and does not constitute legal advice. We recommend you seek legal advice before acting on any information given.
