EXPLAINER: Pensions in divorce or separation

Pension benefits are considered an asset in divorce and separation proceedings.

Pensions are often one of the most valuable marital assets—but also one of the least understood. Public sector pensions and Defined benefit pensions can carry considerable value that isn’t obvious at first glance.

Properly valuing and considering these in divorce negotiations is essential to reaching fair and informed outcomes.

Defined Benefit vs. Defined Contribution

• Defined benefit (DB): Offers a secure, predictable payout for life that does not change based on the stock market. For example, a scheme might promise half of your final salary after 40 years of service. This level of certainty is highly valuable, especially in retirement when budgeting becomes crucial.
• Defined contribution (DC): Builds a personal pot from your and your employer’s regular savings. The final amount depends entirely on how well the market investments perform.

Very few private companies still offer open DB schemes. Most private employers have closed legacy DB plans to new entrants or stopped future accruals, switching instead to defined contribution (DC) schemes.

Can a pension be divided by agreement?

No- you need a Court Order. A pension scheme is a trust, governed by the rules of the scheme . The trustees can only pay benefits to a person who is within the scope of the scheme rules, and a separation agreement, however thorough, simply has no legal effect on the trustees.

If the parties wish to divide or protect a pension as part of their financial settlement, that division must be sanctioned by the court in the form of a Pension Adjustment Order.

Pension Adjustment Orders

A Pension Adjustment Order is a direction from the court to the trustees of a pension scheme, requiring them to set aside or pay out a defined portion of the pension benefits to the non-member spouse.

• The relevant period – the period of the member spouse’s service under the scheme that is being taken into account. This begins on a date specified in the order (often the date of marriage or the date the member joined the scheme, whichever is later) and ends no later than the date of the decree.
• The relevant percentage – the proportion of the benefits accrued during the relevant period that is to be transferred to, or earmarked for, the non-member spouse. This can be set at anything from a fraction of one per cent up to 100 per cent.

Pension Benefits

Pension schemes provide for two distinct types of benefit, and each is dealt with under a separate order:

• Retirement benefits – the pension, lump sum, and any other benefit payable to the member on retirement, or to dependents after the member’s death in retirement.
• Contingent benefits – essentially the death-in-service benefits payable if the member dies while still in employment.

The distinction is important because the time limits and long-term consequences are different.

Time limits

A Pension Adjustment Order in respect of retirement benefits can, in principle, be applied for at any time after the grant of the decree, although as a matter of practice it should be dealt with at the same time as the other ancillary financial orders.

Delay rarely improves matters, and in some cases can prejudice the non-member spouse if the member retires or dies in the meantime.

A Pension Adjustment Order in respect of contingent benefits is subject to a strict time limit. The application must be made within one year of the grant of the decree of divorce or judicial separation.

Post Divorce

• Earmarking Approach

The trustees retain the entirety of the fund, but a defined share of the benefits, calculated by reference to the relevant period and the relevant percentage, is paid out to the non-member spouse when the member retires (in the case of retirement benefits) or dies (in the case of contingent benefits).

The non-member spouse remains, in effect, tied to the member spouse’s pension life cycle.

• Pension Splitting

The second is the pension splitting or transfer approach, in which the non-member spouse’s share is calculated, valued, and transferred out of the original scheme into a separate, independent pension arrangement in the name of the non-member spouse.

This is often preferable, since it gives the non-member spouse full control over their own retirement provision, breaks the financial link with the former spouse, and avoids the complications that can arise on remarriage or death.

Whether splitting is available, and whether it makes financial sense, depends on the type of scheme, the rules of the scheme, the cost of the transfer value, and the relative ages and circumstances of the parties.

Public service schemes, in particular, can be technically complex, and specialist actuarial advice is normally required.

• State Pension

A common question we are asked is whether the State Pension (Contributory) can be divided between spouses on divorce. It cannot.

A Pension Adjustment Order can only be made in respect of an occupational pension scheme, a Personal Retirement Savings Account (PRSA), a Retirement Annuity Contract (RAC), or a Pan-European Personal Pension Product (PEPP). The contributory State Pension is a social welfare entitlement, not a pension fund.

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For further advice or if you wish to discuss any other legal area please contact [email protected] or telephone 052-6124344.

The material contained in this blog is provided for general information purposes only and does not amount to legal or other professional advice.

While every care has been taken in the preparation of the information, we advise you to seek specific advice from us about any legal decision or course of action.

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