Why pensions matter in divorce

Going through a divorce is one of the most challenging experiences you may face in your life. Among the many difficult decisions and complex financial matters you'll need to address, dealing with pensions can feel particularly overwhelming.

Many people going through divorce don't fully understand the importance of pensions or how they should be dealt with as part of the financial settlement. In fact, pensions are misunderstood or overlooked in divorces every single day, and it can cost people their financial security in retirement.

This article explains why pensions should be at the top of your list when thinking about your divorce settlement, not an afterthought.

The truth about pensions in divorce

When most people think about their assets during divorce, they immediately think of their home, their savings accounts, and perhaps their cars or other possessions. Pensions often come as an afterthought, or even worse, are overlooked altogether, which is a serious mistake.

For many couples, particularly those who have been married for a long time or are approaching retirement age, pensions represent their largest financial asset. A pension that someone has contributed to throughout a 30 or 40-year career can easily be worth several hundred thousand pounds. Your pension, or your spouse's pension, might be worth more than your family home. Yet it's the house that gets the attention while the pension sits quietly in the background, barely discussed.

What makes pensions so valuable?

The value becomes even more significant when you consider what a pension actually represents.

Unlike your home or your savings, a pension is designed to provide you with an income for the rest of your life after you stop working. It's not just a pot of money but your financial security for potentially 30 or 40 years of retirement. If you don't receive a fair share of pension assets in your divorce, you could face serious financial hardship in your retirement years, potentially decades after your divorce is finalised.

By then, it's too late to go back and fix things because the divorce is done, the pensions are divided, and you're living on whatever income you have. This is why getting it right matters so much.

Why do people overlook pensions?

There are several reasons why pensions don't always get the attention they deserve during divorce, and it's worth understanding these because you might be falling into one of these traps yourself.

Unlike a house you can see and touch, or money sitting in a bank account, a pension is a promise of future income. You can't walk around inside a pension or spend it right now, which makes it harder to grasp its true value and importance.

When you're sitting across from your spouse (or your solicitors are negotiating), and someone says "the house is worth £400,000", you can picture what that means. But when someone says "the pension has a Cash Equivalent Transfer Value of £250,000", it's much harder to visualise and understand what that actually means to you, which makes it easier to dismiss or overlook.

You can't simply look at a statement to see what your pension is worth in simple terms. It's not like checking your bank balance. Finding out requires obtaining specific valuations from pension providers, which can take months. And if you don't ask for these valuations, they won't appear. The pension sits there, invisible, while you negotiate on ownership of other assets.

Pensions do involve some technical terminology and concepts. Cash Equivalent Transfer Values, Defined benefit schemes, Pension Sharing Orders. It's a different language, and when you're already dealing with the emotional stress of divorce, the last thing you want is more complexity.

So people avoid the topic, hope someone else will deal with it, assume it will sort itself out, or just give up and accept whatever arrangement is suggested without really understanding it.

When you are divorcing, you often focus on where you will live and how you will manage financially in the short term. Where are the children going to sleep? How will I pay the mortgage next month? Can I afford to keep the house?

Retirement can seem a long way off. If you're in your 30s, 40s, or even early 50s, retirement might be 15 or 20 years away. It doesn't feel urgent compared to the immediate pressures of finding somewhere to live or paying the bills. But the decisions you make now will determine whether you can afford to heat your home and buy food when you're 70 years old.

The people who suffer most

It's usually the person who stayed at home to look after the children who loses out when pensions are overlooked in a divorce. The person who gave up their career, or went part-time, or took years out of the workplace. The person who has little or no pension of their own because they were busy raising the family, while their spouse was busy building a pension.

This is often the wife, though not always. But whoever it is, they're the one who ends up in their 60s or 70s with barely any pension income, watching their ex-spouse retire comfortably on a generous pension that was built during the years of the marriage.

The law recognises this isn't fair. The law says that pensions built up during a marriage should usually be shared. But the law can only help you if you actually address the pensions as part of your divorce. If you don't raise it, if you accept a settlement that ignores the pensions, the law can't protect you.

What does it actually mean to overlook pensions in your divorce? Here are some real situations that solicitors see regularly.

You agree to keep the house, and your spouse keeps their pension. On the surface, this may seem fair because you both get something valuable.

But if you think ahead 20 years, when the house is paid off, it will not provide any income. Meanwhile, your ex-spouse is receiving £30,000 a year from their pension while you're surviving on the State Pension of around £11,500 a year (if you even have a full entitlement). You can't afford to run the house anymore; you can't afford to heat it properly; and you certainly can't afford holidays, treats, or to help your grandchildren.

Meanwhile, your ex-spouse is comfortable. Not because they were smarter or worked harder, but because you agreed to a settlement 20 years ago that ignored the pension.

On the flipside, if you're the one with the pension. You may think "it's my pension, I earned it, why should I share it?" But the court sees things differently. The court sees a partnership in which one person earned money and built a pension, while the other made it possible by running the home and raising the children. Both contributions have value. When the court makes its decision, you might have to share your pension anyway, but by then you've spent money on lawyers and court fees that could have been avoided.

Pension Sharing Orders

Yes, dividing pensions fairly is the right thing to do. But there's also a practical reason to address pensions properly in your divorce.

Pension Sharing Orders, once implemented, cannot be changed. This is different from things like spousal maintenance, which can be varied if circumstances change. Once your pension is divided and the order is implemented, that's final.

This means you cannot come back in five years or ten years and say "actually, I didn't understand what I was agreeing to" or "I didn't realise my pension was worth so much more than we thought." The time to get it right is now, during your divorce, not later when you're approaching retirement and panic sets in.

What you should be asking

If you take nothing else from this article, you should be asking these questions:

• What pensions do we both have? Not just the obvious ones, but all of them, including old workplace pensions from jobs held years ago and small personal pensions.
• What are the pensions worth? Ensure you get proper valuations in writing.
• How should pensions be dealt with in our settlement? Should they be shared? Should they be offset against other assets?
• Do I need expert advice? For anything other than small, simple pensions, the answer is probably yes.

What happens next?

Getting your pension matters sorted starts with understanding what you're dealing with. In our companion articles, we explain:

• The different types of pensions in the UK and why it matters which type you have (particularly if you or your spouse has a public sector pension)
• The three main options for dealing with pensions in divorce: Pension Sharing Orders, pension offsetting, and pension attachment
• How pensions are valued and why you might need a specialist called a PODE (Pension On Divorce Expert)
• Common mistakes people make with pensions in divorce and how to avoid them

Each of these topics matters and could significantly impact your financial future.

Ignoring pensions during your divorce can be one of the most expensive mistakes you make. The time to address them is now, while you're sorting out your financial settlement, not later when it's too late to do anything about it.

You deserve to have financial security in your retirement. The law recognises this, and you need to make sure your divorce settlement does too.