By Katie McCann, barrister and founder of Lowry Legal based in Manchester, England.
Pensions can be one of the most valuable assets in a divorce, yet they’re not always treated with the same urgency as the other headline features of property and savings. But when they’re handled without due care in pursuit of a quicker settlement, the financial repercussions can be serious for separated retirees.
For high net worth couples, the sums involved are often huge, which raises the stakes even higher. Factors including multiple pension schemes, defined benefit arrangements, Self-Invested Personal Pension (SIPPs) holding business assets, and overseas pensions all add extra layers of complexity that a standard approach to division of assets might struggle to navigate.
It’s crucial to understand that if you’re currently going through a divorce, pension sharing deserves the exact same scrutiny as other valuable possessions. Getting this right could impact your quality of life for decades to come.
This guide explains the main pension division strategies available in England and Wales. It covers how the court approaches pension distribution in divorce, and what high earners need to consider before making any commitment.
What Happens to a Pension in Divorce?
As with any other asset, pensions aren’t automatically split between parties when a marriage ends. They must first be disclosed as part of financial proceedings, and the court has full power to make orders dividing them. This includes pensions accumulated before the marriage and, if they can be valued, those held overseas.
The court’s starting point for asset division is fairness, not equality. Although a 50/50 split is often where negotiations begin. In practice, three approaches are available to you here: pension sharing, offsetting, and earmarking.
Each option works differently and is more suited to certain specific circumstances. Choosing the ‘right’ strategy depends on the type and value of the pensions involved, the contents of the wider asset pool, and what each party actually needs from their retirement.
The Three Pension Division Strategies
When it comes to dividing pensions on divorce, the three main approaches each bring their own advantages and trade-offs. The most common is a pension sharing order, which provides a clean break by splitting the pension into two separate pots for each party to manage independently.
Another option is pension offsetting, where one spouse keeps their pension intact in exchange for giving up other assets of equivalent value.
Finally, there’s earmarking (sometimes called pension attachment); a less popular route that relies on the pension holder making payments to their former spouse when pension benefits are eventually drawn.
Pension Sharing Order: For a Clean Break
A pension sharing order transfers a defined percentage of one party’s pension to the other, creating two separate pension pots. The receiving spouse can either join the existing scheme, if available, or transfer their share to a new provider. From that point, each person manages their own pot independently.
Sharing is the most popular strategy, and it’s usually preferable where pension wealth is significant and a clean financial break is the priority.
The receiving spouse will no longer be dependent on the other party’s retirement decisions, career longevity, or financial choices. Instead, both parties go their separate ways with their own retirement provision secured.
For high net worth divorces, pension sharing orders are popular when:
- One spouse has a substantially larger pension. More common where one party has worked throughout the marriage and the other has either chosen not to, or has taken time out of work to raise children.
- The pension pot is large enough to meaningfully fund two retirements.
- A defined benefit (final salary) scheme is involved. These require specialist actuarial input to value and divide fairly.
- The separated couple want closure and to avoid an ongoing financial connection.
One important consideration: the percentage transferred is based on the Cash Equivalent Transfer Value (CETV); the pension provider’s assessment of what the pension is worth today.
In high net worth cases, CETVs (particularly for defined benefit schemes) should always be reviewed by a pension on divorce expert (PODE), to establish the true value of the pension.
Pension Offsetting: To Keep the Pension and Trade Other Assets
Pension offsetting allows one spouse to retain their pension in full, with the other receiving a larger share of different assets, i.e., property, savings, and investments, as compensation.
Offsetting works well in theory but requires careful handling in practice.
Pensions and properties are fundamentally different assets: one is liquid and immediately accessible, while the other is locked away until retirement and subject to income tax on drawdown. This means that simply matching their headline values won’t necessarily ensure a fair trade.
For HNW couples, offsetting can make sense where:
- One spouse strongly wishes to retain their pension intact. For example, a defined benefit scheme that would lose significant value if shared.
- There are sufficient liquid assets to provide a genuine equivalent.
- The receiving spouse is younger and has more time to build their own retirement provision.
- Tax treatment and accessibility are accurately factored into the comparison.
The risk of a poorly-handled offset is that the spouse who takes the property instead of the pension ends up significantly worse off in retirement. This is more likely when factors including the pension’s tax-free growth and income potential aren’t properly accounted for.
Obtaining independent financial advice alongside legal guidance is often essential at this stage. An experienced solicitor will ensure you have enough financial acumen in your corner to tackle your case effectively.
Pension Earmarking: The Last Resort
Pension earmarking, also called a pension attachment order, is a court order directing the pension provider to pay a portion of the pension directly to the former spouse when benefits are drawn.
In most cases, earmarking is seen as the weakest of the three options and is used infrequently for good reason.
The main issue is that it creates an ongoing financial dependency that most people would rather end at the point of divorce.
Additionally, the recipient becomes reliant on the pension holder’s decisions and health. If they opt to delay retirement, their former spouse must wait; if they remarry, the pension position can change significantly; and if they die before drawing their pension, an earmarking order will usually fail.
Earmarking is only occasionally considered where pension sharing is genuinely impractical. Examples include certain public sector schemes that cannot be shared, or where the pension is already being drawn down and sharing will just create complications.
Ultimately, for most HNW divorces, it is usually regarded as a last resort.
How Does the Court Value Pensions in Divorce?
Before any pension distribution in divorce can be agreed or ordered, the pensions must be valued. This is done using the Cash Equivalent Transfer Value (CETV): a figure the pension provider is obliged to supply on request, which is valid for three months.
For more straightforward defined contribution pensions, the CETV is usually a reasonable starting point. For defined benefit (final salary) schemes (more common among senior professionals, public sector workers, and long-serving executives), the CETV can significantly understate the true value of the pension income it will generate.
This is why, in any high net worth divorce involving a defined benefit scheme, instructing a Pension on Divorce Expert (PODE) is essential. A PODE can produce a report that gives the court a fair and accurate basis for division, accounting for factors the CETV doesn’t reflect, such as the pension’s income stream in retirement, early retirement factors, and survivor benefits.
How Do I Protect My Pension in a Divorce?
Pension protection requires understanding your options and getting the timing right. The earlier you take advice, the more choices are likely to be available.
If you are the pension holder, the most important steps are:
- Ensure all pensions are properly disclosed. Failing to disclose is a serious legal risk, and courts take a dim view of it.
- Obtain CETVs early and consider whether a PODE report is warranted.
- Think carefully about offsetting proposals. Trading your pension for the family home may suit the other side far more than it suits you.
- Consider whether a consent order agreed between the parties gives you more control over the outcome than a contested hearing.
If you are the non-pension owning spouse, don’t accept the first figure without proper scrutiny. In longer marriages, pension wealth can dwarf the value of most other assets. In such circumstances, you should:
- Push for PODE reports on any defined benefit scheme. The CETV alone will not usually be sufficient.
- Challenge any proposal to offset your pension entitlement against illiquid or depreciating assets.
- Be aware that accepting property in place of pension rights can leave you significantly worse off in retirement, even if the nominal values appear to be equal today.
HNW Considerations for Pension Distribution in Divorce
Generic guidance on pension sharing in divorce may cover the basics, but it rarely incorporates what matters most for high earners. These features include:
Multiple (and complex) pension arrangements. Senior executives, business owners, and professionals often hold several pensions simultaneously, such as SIPPs, occupational schemes, legacy defined benefit arrangements, and overseas pensions. Each one must be valued separately, and the interaction between them will influence the overall strategy.
SIPPs holding business assets. Where a SIPP holds commercial property or shares in a private company, valuation becomes even more complex, making specialist input practically essential.
The lifetime allowance legacy. While the lifetime allowance was abolished in April 2024, those with large pension pots may still have transitional protections in place that affect how their pension should be approached in a settlement. Advice from a specialist financial adviser alongside a family lawyer can be crucial here.
Tax. Pension income is taxable on drawdown. This means that a £1m pension pot is not necessarily the same thing as £1m in cash. Any offsetting calculation that doesn’t account for the tax treatment of pension income vs other assets is not likely to be a reliable comparison.
Frequently Asked Questions: Divorce and Pension Sharing
Can a pension sharing order be cancelled?
Once a pension sharing order has been sealed by the court and implemented by the pension provider, it cannot be undone. Before implementation, a pension sharing order can be varied or set aside by the court, but this is rare and requires strong grounds. This is a good reason to take advice before agreeing to any pension sharing arrangement, as once it’s done, it’s done.
If I remarry, can my ex claim my pension?
If a pension sharing order has already been made and implemented, your ex-spouse has their own pension pot and has no further claim on yours, regardless of whether either party remarries. Earmarking orders are different; remarriage of the receiving spouse typically ends an earmarking order. This is another reason pension sharing is generally preferable to earmarking for most people.
Do I have to share my pension when I divorce?
TNo, there is no automatic obligation to share a pension in divorce. However, all pensions must be disclosed, and the court will consider them as part of the overall financial settlement. Whether pension sharing is appropriate depends on the broader financial picture, including the length of the marriage and the needs of both parties. In longer marriages with high pension wealth, pensions are usually a central feature of the settlement.
What if my spouse refuses to instruct a PODE?
If you cannot agree to a joint instruction, you can apply to the court for an order requiring expert evidence under FPR Part 25. In high-value cases, courts are increasingly willing to direct the parties to obtain a PODE report where one is clearly needed for a fair outcome.
Does the court have to follow the PODE report?
No, the report is expert evidence, not a binding decision. The judge retains discretion and will consider the PODE report alongside all other evidence. In practice, however, a well-prepared PODE report from a jointly instructed expert carries significant weight and is rarely disregarded without good reason.
Choose the Right Strategy For the Right Outcome
Pension division is far from a technicality to be resolved at the end of financial proceedings. In fact, for some it’s the single most influential financial element of the entire divorce. Therefore, the difference between a well-advised pension sharing strategy and a poorly-negotiated offset can run into, at a minimum, hundreds of thousands of pounds over the course of retirement.
Lowry Legal advises high net worth clients across England and Wales on all aspects of divorce financial settlements, including complex pension division, PODE referrals, and consent order drafting.
Contact us today for a confidential initial conversation with a specialist family lawyer.
This article is intended as general guidance only and does not constitute legal advice. Pension and family law rules can change, and every case is different. Always seek specialist legal advice for your specific situation.
