A Guide to the Treatment of Pensions on Divorce

Table of Contents


The aim of this guide is to improve understanding and encourage good practice in the area of pensions on divorce.  We offer the professional assistance of a Pension on Divorce Expert (PODE), ensuring that many of the complicating features are dealt with fairly.

If any of the issues below are affecting you directly, or if you are a legal practitioner deciding whether to take the advice of a PODE, we would be delighted to help.

When a couple gets divorced, one or both parties’ pensions may be distributed between the couple. 

We will now summarise the main ways of splitting pension assets: Pension Sharing Orders, Earmarking and Offsetting.

Pension Sharing Order

When a Pension Sharing Order is accepted, the court decides how much of the member’s pension the ex-spouse will receive, which is expressed as a percentage of the member’s pension transfer value. The value is then deducted from their fund and credited to a pension in the ex-spouse’s name.  The split will always be based on the cash equivalent value.

Qualifying or Disqualifying Credits

Almost all types of pensions can be subject to a pension sharing order, including those in payment.

After the assets have been valued and apportioned, unforeseen complexities may arise, highlighting again the importance of seeking advice.  A pension credit is defined as an ex-spouse’s share; conversely, the loss created is known as a pension debit.

A pension credit will then either be qualifying or disqualifying.  The best way to explain the difference between these types of credit is by example: if a credit is from uncrystallised rights (never accessed), it will be deemed ‘qualifying’, which means that the ex-spouse will be able to take a tax free cash lump sum (TFC).

However, if the credit originates from a policy that was already in payment (crystallised), they would be regarded as’ disqualifying’, meaning the spouse will not be able to take a lump, as the tax free element has previously been taken.

Importantly, a pension credit will not be tested against the ex-spouse’s annual allowance, provided the payment comes from another registered pension scheme.

Advantages and Disadvantages of Sharing Orders
Advantages of Offsetting Disadvantages of Offsetting
  • Provides the couple with a clean break
  • Provides a pension provision for both parties, including tax-free cash and income benefit
  • Provides a pension and complete control for the ex-spouse
  • Remarriage, death, or any other personal changes will not affect the order
  • The member’s future lump sum and income will be reduced
  • It may be difficult to split some types of pensions
  • For high earners, a pension credit could have an impact on their Lifetime Allowance
  • The non-pension member / ex-spouse may not be able to access the pension until a date specified by the rules of the member’s pension scheme, or rules of any scheme the pension is being transferred to
  • Implementation fees will apply


Pension earmarking (also known as pension attachment) redirects all or part of the member’s pension benefits, however, it is different to a sharing order in that the pension holder retains full ownership and control over how and when it is accessed. 

Given this on-going link, it does not provide a clean break for the couple and also leads to further practical limitations.  As a result, is not widely used.

Further restrictions associated with ownership are as follows:


In other circumstances, a couple may decide on an alternative arrangement, known as offsetting.

Offsetting is now the dominant practice for settling pension funds; this method concerns the future pension rights being traded for the equivalent capital or ‘money now’. It is often seen as the more attractive route, as what the ex-spouse receives could be immediately realisable, in comparison to pension funds which cannot be accessed until age 55, or a scheme’s nominated retirement age.

Although offsetting can be seen as a quick and easy method of splitting assets, it can also be complex as each party’s financial situation and liquidity of assets is not always straightforward. It can also only be used when there are significant assets to offset against.

Advantages and Disadvantages of Sharing Orders
Advantages of Sharing Orders Disadvantages of Sharing Orders
  • A simple resolution that gives the couple a clean break
  • Suitable for a couple who are both financially successful and each have pension provision in their own name
  • One party may have greater need for the use of the other asset (ie property)
  • If one party suffers ill health there may be a greater need for a benefit now rather than a pension later in life
  • If the pension is small, the costs involved with a sharing order could be disproportionate to the benefit
  • Offsetting orders are unaffected by remarriage or death
  • The member could be left with significantly reduced pension provision, which could be disadvantageous depending on how close they are to retiring
  • It may not fully account for the tax situation on the respective pension accounts, as tax will be payable once in payment Mixing categories of assets could result in unfairness and valuation/liquidity issues

Valuing Assets

The essential stage for any divorce case will be the valuation of the couple’s pensions and assets.  There are many limitations to using Cash Equivalent (CE) values as this approach does not always result in equal benefits payable. 

Pensions can be notoriously difficult to value and expert advice should be sought.  There are a range of complicating features that could impact a calculation; not limited to the following:

The true value of a pension in the future may also be uncertain; for example, £100,000 of pension assets to commence payment in 20 years’ time may not be the same as £100,000 of capital now. A Financial Adviser could assist with financial modelling, helping an individual to assess whether taking capital upfront could potentially result in them being comparatively worse off in the medium to long term. 

Every case will be unique, where retaining the family home may be worth more to an individual now, it is also important to think of future needs and ensure that sufficient retirement provision is in place. Each party should be made aware of all implications of what they are losing, retaining, and obtaining.

Other Considerations

In some circumstances this may be the first time the ex-spouse has taken on a pension or a significant sum of money to be invested. It is therefore important that before agreeing to the divorce settlement, not only take legal advice, but also financial advice is sought regarding the suitability of the investment strategy adopted.

It is essential to have a detailed understanding of the taxation rules that affect pensions, particularly in respect of the Annual Allowance, Lifetime Allowance and if either party has protections in place.

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