Divorce in later life, often referred to as “grey divorce”, is on the rise across the UK. Couples in their 50s, 60s, and beyond face unique and complex financial challenges, especially regarding retirement planning. Among the pivotal considerations is the division of pension assets, which are frequently some of the most valuable assets in a marriage. 

A fair division of pension assets is crucial for protecting each party’s financial future after divorce. This guide outlines the legal framework and financial strategies for managing pensions in later-life divorce, helping to ensure robust long-term security.

Why Pensions Are Critical in Divorce

Pensions often represent the most substantial asset in a marriage, sometimes outweighing the value of the family home. Overlooking pensions during divorce proceedings can lead to financial hardship, particularly for those who relied on their spouse’s retirement planning or took time out of the workforce, making it crucial to consider the partner’s pension when assessing retirement planning and division. A fair pension settlement is essential for achieving a balanced and sustainable financial outcome. It is essential to accurately identify and value all pensions involved in a divorce to ensure a fair division of assets.

The Legal Framework for Pension Division

Under Section 25 of the Matrimonial Causes Act 1973, UK courts consider all financial resources and circumstances when determining fair settlements. Key factors include:

• Income, earnings potential, and property for each party

• The parties’ standard of living during the marriage

• Age and duration of the marriage or civil partnership

• Each party’s contributions, both financial and non-financial

• Anticipated future needs, especially in retirement

Courts typically treat pensions as matrimonial assets. Even if a pension is in one partner’s name, it is generally subject to division to ensure both parties’ needs are met equitably. These legal considerations form a key part of the divorce process when dividing pension assets.

Types of Pensions

Grasping the different types of pension schemes is absolutely crucial when you’re navigating the choppy waters of divorce or dissolution – and trust me, each type can throw up its own unique challenges for your financial settlement. The pension landscape includes defined contribution schemes, defined benefit schemes (you’ll often hear these called final salary or career average pensions), personal pensions, workplace pensions, and state pensions – quite a mixed bag, really.

Now, defined contribution schemes are essentially a bit of a gamble – they are based on what you’ve put in and how well your pension fund has performed in the markets, which means your eventual retirement income could be anything. Defined benefit schemes, particularly those golden final salary pensions, are a completely different beast altogether – they provide you with a guaranteed income in retirement based on your salary and years of service, making them incredibly valuable assets when it comes to pension sharing or pension offsetting negotiations. These are the ones that can really tip the scales in a settlement.

Personal pensions are typically something you’ve sorted out yourself, especially if you’re self-employed or haven’t been enrolled in workplace pensions. Workplace pensions can be either defined benefit or defined contribution, and are provided by your employer as part of your employment package – though the quality and generosity of these can vary enormously from one employer to another.

State pensions, including the basic state pension and the additional state pension, come courtesy of the government. While the basic state pension isn’t something you can share, the additional state pension may well be considered when you’re negotiating your financial settlement and it’s worth remembering this can add up to a significant sum over time. Recognising exactly what type of pension you’re dealing with is absolutely critical for determining the most appropriate method of division – whether you go down the route of pension sharing, pension offsetting, or pension attachment. Each approach has vastly different implications depending on the pension scheme involved, so understanding these distinctions is genuinely key to achieving a fair and sustainable outcome that works for both parties in the long run. In my experience, getting this wrong can cost you dearly, both financially and emotionally.

Methods of Pension Division in Divorce

Courts have three primary mechanisms for dividing pensions. The choice of method for dividing pensions can significantly impact the overall divorce settlement.

Pension Sharing Order

This is the most common method and involves splitting a pension pot at the time of divorce. A court-determined share (the pension credit) is transferred from one spouse’s pension to the other, allowing both individuals to manage their own retirement income independently. The pension credit can be moved into an existing pension plan or a new pension plan, depending on the recipient’s preference. Pension providers are required to process and execute a Pension Sharing Order within a legally mandated implementation period. This approach is especially relevant in long marriages or when there is a significant pension imbalance.

Pension Offsetting

Pension offsetting allows each party to retain their own pension. In exchange, the other spouse receives non-pension assets of equivalent value, such as a greater share of the family home or investment portfolio. Accurate valuation is crucial, especially with defined benefit or final salary pensions, which can have a higher true value than the stated amount. When valuing pensions for offsetting, it is important to consider income tax implications, particularly for higher-rate taxpayers, as pensions are taxed when payable.

Pension Attachment (Earmarking)

A pension attachment order (also known as a pension earmarking order) is where the court instructs one party’s pension provider to allocate a portion of future pension benefits, such as pension payments including lump sums and regular income, to the other party (the former spouse or civil partner) when the pension comes into payment. Pension earmarking is a method used in divorce settlements to direct these future benefits or lump sums to the other party, rather than splitting the pension immediately. However, this method is increasingly rare due to its limitations; for example, death benefits may be affected, if the pension-holder dies before retirement, the other party may lose entitlement to any earmarked benefits. Additionally, payments may cease if the beneficiary remarries.

Pension Valuation and the Importance of Expert Advice

Having up-to-date pension valuations and information is crucial to ensure fair and informed decisions during divorce proceedings. Valuing pensions, particularly defined benefit or public sector schemes, can be complex. The cash equivalent transfer value (CETV) issued by the pension scheme may not accurately reflect long-term value, and specialist actuarial input is often required. At Edwards Family Law, collaboration with pension actuaries and financial planners can support:

• Identifying and valuing all the pensions, including overseas pension schemes

• Accurate pension valuation, including assessment of protected payment entitlements where applicable

• Scenario modelling for various division outcomes

• Evaluation of tax implications

• Planning sustainable retirement income for both spouses, considering how pension funds can be transferred to an existing pension or used to establish a new one

Expert advice mitigates the risk of undervaluing pensions or accepting an imbalanced settlement. Consulting a financial adviser who specialises in pensions and divorce can provide valuable guidance and help avoid costly mistakes.

Cash Equivalent and Lump Sum Payments

When you’re navigating the complexities of dividing pensions during divorce or dissolution, there are two financial concepts that I would say are absolutely crucial to understand: the cash equivalent transfer value (CETV) and tax-free lump sum payments. The CETV, in my experience, represents what I consider to be the real cash value of your pension fund – it’s what we use to calculate exactly how much of that pension can be transferred to a new scheme or used in what we call pension offsetting against your other marital assets. This value becomes the cornerstone for determining what constitutes a fair pension share, and frankly, it’s essential for ensuring that both you and your former partner receive what you’re genuinely entitled to from those pension benefits.

Now, here’s something that many people don’t fully appreciate – most private pension schemes will actually allow you to take a tax-free lump sum when you reach pension age, usually up to 25% of your pension fund. This tax-free cash can represent a hugely significant asset in your financial settlement, and it’s something we need to consider carefully, whether you’re planning to take it immediately or factor it into the overall division of your assets. What’s particularly important to understand is that pension attachment orders can also direct a portion of any future lump sum payments directly to your former spouse or civil partner – something that can have long-term implications for your financial planning.

Given just how complex calculating the cash equivalent transfer can be, not to mention understanding the various tax implications of lump sum withdrawals, I cannot stress enough how essential it is to seek professional advice. In my view, an accurate assessment is absolutely vital to ensure that all your pension benefits – including those potential lump sums and the true transfer value – are properly considered alongside your other marital assets. This approach, I believe, is the only way to achieve what you’re really looking for: a fair and genuinely informed financial settlement that protects your future.

Additional Financial Considerations in Later-Life Divorce

Divorce impacts not only pensions but all financial assets, requiring a comprehensive review to ensure a fair division. Later-life divorce impacts all areas of retirement and estate planning, such as:

The Family Home

Decisions must be made about selling, retaining, or downsizing the family property. If one spouse remains, equity release, offsetting, or buyout may form part of any financial settlement.

Spousal Maintenance

Courts may award spousal maintenance where one party has limited earning opportunities, focusing on fairness and practical needs in retirement. Achieving a clean break remains a priority, but it must be feasible given the parties’ circumstances.

Investments, Savings, and Tax Planning

Liquid assets such as cash, ISAs, and portfolios are divisible, but tax efficiency and accessibility should be considered. Divorce may affect both parties’ tax positions and pension contributions, making early financial advice imperative. As part of the financial settlement, pension benefits may be transferred to a new scheme, which can have tax and investment implications.

Estate Planning

Divorce necessitates updates to Wills, pension beneficiary nominations, and life insurance policies, as former spouses automatically lose certain beneficiary rights after divorce.

Civil Partnership Considerations

When you’re facing the breakdown of a civil partnership, you’ll find that many of the financial considerations mirror those you’d encounter in a divorce – and trust me, pension division can be one of the trickiest areas to navigate. Based on my experience, pension sharing orders, pension offsetting, and pension attachment orders are all very much on the table when it comes to splitting pension rights, and I can’t stress enough how important it is to get this right to protect both parties’ financial futures.

Now, here’s where things can get a bit sticky – there may well be specific rules around pension rights that were built up before your civil partnership even began, and these can really throw a spanner in the works when it comes to how pension assets are treated in your financial settlement. In England and Wales, I’ve seen that most pension rights you’ve both acquired during the civil partnership are generally considered marital assets, which means they can be subject to a pension sharing order or other division methods – but the devil, as they say, is in the detail.

You really cannot afford to go it alone here. I would strongly encourage you to seek professional advice to fully understand what you’re entitled to and what options are actually available for dividing those pension pots. From what I’ve observed, this approach ensures that your financial settlement is not just fair, but comprehensive and tailored to your unique circumstances – and frankly, safeguarding both of your pension savings and long-term financial security is too important to leave to chance.

Common Mistakes to Avoid

Some frequent errors in later-life divorce and pension cases include:

• Disregarding smaller pensions or presuming them to be insignificant

• Accepting CETVs without actuarial review

• Failing to disclose all pensions, including overseas or dormant schemes

• Overlooking state pension entitlements and tax consequences

• Focusing on immediate assets at the expense of long-term pensions

• Failing to seek professional advice can lead to unfair outcomes in pension division

Financial Planning for a Secure Future

Robust retirement and lifestyle security after divorce requires careful, strategic planning:

• Engage specialist divorce financial planners early in the process

• Conduct long-term retirement income projections

• Consider annuities or drawdown options for income stability

• Use pension sharing to equalise post-divorce retirement income

• Approach equity release or asset sales carefully, with professional advice

At Edwards Family Law, collaboration with trusted actuaries and wealth managers ensures comprehensive solutions tailored to each client’s future goals.

Practical Steps in Managing Later-Life Divorce

Adopt a proactive and organised approach:

• Collect pension statements, CETVs, property valuations, and all financial documentation at the outset

• Obtain legal advice before agreeing to any division or settlement

• Consider mediation or collaborative processes to streamline negotiations

• Ensure any financial agreement reached is made legally binding through a court-approved order

• Give attention to emotional health and seek support services if needed

• Focus on creating a lasting, stable financial structure

How Edwards Family Law Can Support

As a boutique family law practice, Edwards Family Law guides High-Net-Worth clients in navigating complex financial and pension settlements. Services include:

• Expert advice on pension sharing orders and full financial disclosure

• Collaboration with pension actuaries and financial planners

• Structuring settlements to protect long-term independence

• Assistance with applying for a financial order to formalise the division of assets, including pensions

• Confidential, pragmatic support from experienced London solicitors

Contact Edwards Family Law for discreet assistance with your financial planning and pension division during divorce.

Frequently Asked Questions

Are pensions always split in a divorce?

Not always. While courts consider all assets, in long marriages, pension pots are typically divided to ensure fairness.

Can pre-marital pension contributions be protected?

It is possible to argue for the exclusion of pre-marital contributions, but the outcome depends on case details and court discretion.

What is the difference between pension sharing and offsetting?

Pension sharing allocates pension income directly to both spouses, while offsetting grants the other party alternative assets instead of a share of the pension.

Are state pensions included?

The basic State Pension is not shareable, but the Additional State Pension (formerly SERPS) and similar accrued entitlements may be considered in divorce settlements.