Spouses could lose up to £665K by excluding pensions in divorce

• interactive investor’s calculations come ahead of ‘Divorce Day’ (6 January), a term often used by lawyers to describe the first working Monday of the year, when divorce enquiries typically spike after the festive period.

Divorcees risk missing out on life-changing sums of money by failing to include pensions in divorce discussions, according to new calculations by interactive investor.

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Using an initial pension value of £100,000 at age 40 and assuming retirement at 68 (the state pension age is rising to 68 for people born on or after 6 April 1978), a spouse could forgo a financial asset worth over £196,000 if the pension is excluded from the divorce settlement, assuming annual growth of 5% (net of fees) over the 28-year period.

The calculations also assume the couple agrees to a pension-sharing arrangement, splitting the pension 50:50. If the pension grows by 7% annually, the shared pot rises to over £332,000.

The financial impact is even more significant with larger initial pension values. A £200,000 pension, for example, could grow to over £392,000 at 5% annual growth, or nearly £665,000 at 7% annual growth over the same period.

Value of 50% pension pot after 28 years 

Source: interactive investor. Assumes divorce at 40 at retirement at 68, value based on 50% of pension pot at divorce, investment growth net of fees.

Myron Jobson, Senior Personal Finance Analyst at interactive investor, said: “The process of untangling two lives is rarely straightforward and often brings emotional and financial challenges. How finances are divided is frequently a contentious issue, with the family home often seen as the most valuable asset, while pensions are overlooked.

“Pensions are widely underestimated, and our research reveals that the majority of divorcing couples don’t even discuss them. This oversight leads many — particularly women — to miss out on future income that should have been theirs. A pension left invested over a long period of time is turbocharged by the power of compounding, where growth is not only on the original contributions but also on previous returns, significantly increasing the overall value of the pot overtime.

“The emotional toll of divorce, the misconception that other assets take precedence, and a lack of awareness about the long-term financial implications are key reasons why pensions are often ignored. Adding to the confusion is the ever-changing pensions landscape, which makes assessing the long-term value of pension pots more challenging.

“While no one enters a marriage expecting a divorce, understanding your household finances is crucial. It not only provides clarity on your entitlements in the event of a break-up but also helps couples make informed financial decisions during their relationship.”

Splitting pension in divorce

One stark finding from interactive investor’s Great British Retirement Survey 2023, which surveyed more than 9,000 UK savers, is that two-thirds (67%) of divorcees did not discuss pensions during their divorce proceedings.

Women appear to be particularly at risk, with 75% of divorced women surveyed admitting they had not discussed pensions as part of their settlement, compared to 56% of divorced men.

There are three main approaches to dividing pensions during divorce:

1) Pension sharing

The most direct option, this involves splitting the pension between both parties. A court order divides the pension, and a portion is legally transferred to the ex-spouse, creating a separate pension pot in their name. This allows the ex-spouse independent control over their pension, ensuring a clean financial break. There are no implications if either party remarries or dies.

2) Pension Attachment Order (earmarking)

This option entitles one party to receive a share of the pension benefits when the other begins drawing their pension. Payments are made directly to the ex-spouse as part of their retirement income. However, there is no clean break with this arrangement, and payments depend on the pension-holder’s retirement plans. Payments cease if the receiving spouse remarries or the pension-holder dies.

3) Pension offsetting

This involves offsetting the value of the pension against other assets, such as property or savings. For example, one spouse might retain the pension while the other takes a larger share of the house. While this approach provides a clean break and addresses immediate housing concerns, it can be challenging to strike a fair balance. One party may end up with little or no pension provision.

Myron Jobson says: “Pension considerations in divorce are complex and need careful evaluation. Offsetting pensions against other assets may suit some couples, while splitting the pension or earmarking future payouts may work for others. These issues become even more intricate when either party has been married before. It is worth consulting a solicitor to understand the legal and financial implications of pension division.”