Divorce: what it means for pensions and your future retirement

What to consider when it comes to pensions, retirement and divorce.

There’s a lot to consider when you get divorced, from splitting the family home, to other assets such as furniture and cars. And that’s not to mention the emotional impact of divorce too. But it’s important not to forget about your savings and investments, including your pension, as this is one of your most important financial assets. Here are some practical things to consider when it comes to pensions, retirement and divorce.

Where you live in the UK affects how pensions are treated in divorce settlements

In Scotland, currently only pension benefits built up during the marriage or civil partnership are normally treated as marital assets. In the rest of the UK, all pension benefits are generally viewed as marital assets.

It’s important to know the total value of you and your ex-partner’s pension benefits

Without this, you won’t be able to judge if pension assets are being fairly split. When it comes to getting valuations, only the pension scheme member (for workplace pensions), or the individual who took out the pension (for personal pensions), can ask for this.

There are three ways you can deal with pensions in a divorce

1. Offset the value of any pensions against other assets

Here both ex-partners keep their own pension benefits, but the value is included in the balance sheet of all the marital assets. Other items of value are then shared appropriately.

This option provides a clean break and there’s no need to make any changes to existing pensions. But it does run the risk of leaving one person with a pension but very little else if their pension benefits are worth significantly more than the other’s. For example, you might get to keep your pension in return for your ex-partner keeping the family home.

2. Share pension benefits

This involves transferring some of one ex-partner’s pension to the other to give them their own pension pot. Again, this has the benefit of a clean break, with each person having full control over how their pension pot is invested and when they start taking money from it.

3. Earmark pension benefits

This is when one person keeps their own pension benefits and agrees to pay a portion of their retirement income to their ex-partner from the date they start to take it. That means no cash changes hands on divorce. But the income will stop when the pension holder dies, or if the ex-partner remarries or dies first.

There are tax implications when dividing pensions

The different ways of dividing pension benefits have different tax implications. All of this can be very complex and comes at a time you’ll have a lot of things to think about, and not just finances.

If you’re confused about what your change in circumstances might mean for your pension or your ex-partner’s pension, it’s a good idea to first of all speak to your pension provider.

Money Helper (previously The Pensions Advisory Service) also has a free service to help you understand your options and make informed decisions.

If you feel you need more personalised help, think about speaking to a financial adviser. Retirement planning experts at abrdn can help. Find out more about the retirement planning and advice services offered by abrdn.

Alternatively, you can book your free, no-obligation call with an abrdn retirement planning expert today.

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Actively plan 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 the cost of a household, a car, and other living expenses.

It’s also worth remembering that a key life event, such as divorce, is a time to make sure you’ve updated 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.

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.

The information in this article should not be regarded as financial advice. Information is based on our understanding in May 2023. Laws and tax rules may change in the future, and depend on individual circumstances.

Colin Dyer is a client director and financial planning and retirement expert at abrdn.