Pension sharing or offsetting on divorce: how each works

Pensions are usually the second largest asset in a divorce after the family home, and they are the one most often missed. Just 44% of men and 41% of women know that a pension forms part of a divorce settlement, according to the Money and Pensions Service¹. If nothing is done about them, one person can retire comfortably while the other cannot.

There are two main ways to deal with a pension when a marriage or civil partnership ends. A pension sharing order splits the pension itself: part of one person's pension is transferred into a pension in the other person's name, so both end up with their own pot². Offsetting leaves the pension where it is and balances it against other assets instead, so the person keeping the pension gives up a larger share of the house, savings or a lump sum³.

A third route, earmarking or an attachment order, keeps the pension in the owner's name and pays a share of the income to the ex-partner when it is drawn. It is less common and does not give a clean break⁴. This page covers what each option is, what it costs, how long it takes, and where the rules differ across the UK.

Pension sharing or offsetting: how each one works

A pension sharing order is the most common way of dividing pensions in divorce². The court order specifies in percentage terms how the member's benefits should be split, and the share, known as the pension credit, is transferred to a pension arrangement in the ex-spouse's own name⁷. The ex-partner is not entitled to any capital or growth associated with contributions received after the divorce⁸. The order allows a clean break, with the non-member getting a benefit in their own name, under their control⁷.

Offsetting works differently. Each party retains their own pension, but the spouse with the lower pension receives a share of other assets, such as equity in a property or a lump sum, instead². The value of the pension is compared against other assets like the house or savings, and a trade-off is made so both people get a fair deal⁹. The pension member keeps their pension fund intact⁷.

A worked example shows how the arithmetic runs. If the pension fund is worth £150,000 and the family home is worth £300,000, and the court decides the pension holder can keep the pension, the ex-partner would be entitled to £225,000 of the house proceeds⁵.

Pension offsetting: keeping your pension and trading other assets

Offsetting is a relatively simple process that gives both parties a clean break¹⁰. It can be more cost effective than a pension sharing order when the pension is small¹⁰. It can also be used where overseas pensions cannot be shared using a pension sharing order in the UK¹⁰.

The trade-offs are real. The party who takes other assets rather than a share of the pension could lose any life insurance benefits from the other party's pension¹⁰. The party with the pension retains all of their pension rights, whereas the party without the pension must be prepared to give up any rights to a future claim on that pension¹⁰. It can be difficult in some situations to divide assets fairly using offsetting, especially as the value of your pension is not the same as cash in the hand⁵. If the pension is the largest asset, offsetting might not be the easiest way to fairly divide assets¹⁰.

Offsetting orders are not affected by remarriage or death¹⁰. That is a meaningful difference from some other arrangements, where a remarriage can end the entitlement.

Sharing or offsetting: which suits your situation

The bigger the pension pot, the more likely it is that a pension sharing order will be a fairer outcome overall, especially if any of the pensions are defined benefit pensions⁴. Pension sharing is often the preferred choice because it gives both people total control over their pension savings and offers them a clean break⁹. It also ensures that you both have some pension in retirement¹¹.

Offsetting tends to suit cases where the pension is small, where a pension sharing order would be disproportionately expensive for a small pension, where there are overseas pension assets that cannot be shared via a UK court order, or where one person needs the family home⁵. It can also suit someone who needs the family home and is willing to trade pension rights for it⁵.

A pension sharing order has its own drawbacks. One of you will see your future lump sum and retirement income reduced¹¹. A share of the capital is provided, which may be needed to help one of you re-house or meet other immediate expenses, subject to being over normal minimum pension age and the pension not being in payment already¹¹.

Which pensions can be shared, and which cannot

Pension sharing can apply to all types of private pensions, including occupational, personal, registered and non-registered pensions and pensions already in payment⁸. The court has the power to divide both defined benefit and defined contribution pensions, but not your State Pension benefits³.

The State Pension is the big exception. The basic State Pension cannot be shared on divorce⁴. The new State Pension, which applies if you reach State Pension age on or after 6 April 2016, cannot be shared on divorce either². The state pensions that can be shared with a court order are the Additional State Pension and the Protected Payment element of the new State Pension⁴. If you get divorced or your civil partnership is dissolved, the court can decide that your Additional State Pension or the Protected Amount should be shared as part of the financial settlement, but it is lost if you remarry⁷.

You may be able to claim a pension based on the contributions of your current or former spouse or civil partner¹². You can also claim on your former partner's National Insurance record if this gives you a higher rate of State Pension, where you are divorced or your civil partnership has ended¹³.

Pensions in drawdown can be divided, and the remaining balance can be shared between the parties if deemed appropriate³. A pension sharing order can be placed on a pension already in payment, although this can be more complex, and the share is then a disqualifying pension credit with special rules⁷. Pension sharing is also available from schemes where pensions are already being taken, although the process is more complicated and the fees might be higher¹¹.

Getting a pension sharing order through the court

Only the Family Court has the power to grant pension sharing orders³. A specific court order is required⁷. The court will issue a pension sharing order which usually shows the percentage of your pension that is to be shared¹⁵. For Scottish court orders it is a fixed amount¹⁵.

The documentation differs by nation. In England and Wales, a pension sharing order issued by the court is accompanied by a pension sharing annex (Form P1)⁸. In Scotland, a pension sharing order issued by a court or a qualifying agreement is used⁸. In Scotland, a pension sharing order can often be finalised by adding a written copy to the Register of Deeds².

Once the order is made, the scheme member's benefits will be reduced to take account of the provisions of the pension sharing order, and a copy of the order will be forwarded to the new pension provider to take account of any effect on HMRC's maximum benefit limits¹⁶. The person responsible for a pension arrangement must inform the member or the member's spouse or civil partner in writing of the intention to recover costs and provide a written schedule of charges before a pension sharing order or provision is made¹⁷.

Fees may be taken from the pension to cover the pension sharing order costs³. The scheme can only make payments specified in section 164 of the Finance Act 2004, which includes payments pursuant to a pension sharing order or provision¹⁸.

Timescales and fees: up to four months once the scheme has everything

Once the pension provider has all the required information, they have four months to implement the pension sharing order⁸. The pension administrator has up to four months from the point of receiving all relevant information to carry out the order³. Pension providers must complete a pension sharing order within four months of receiving all the information they need¹⁵. The Scottish Public Pensions Agency has four months from the date the documents and administration charge are received to implement the order²⁰.

The clock only starts when the scheme has everything. Once all the documents are received, it can take several weeks or longer to transfer a pension sharing order¹⁵. For comparison, a pension transfer often takes between two and six weeks, but your provider has up to six months to action your request²¹. The Pensions Schemes Act states that it can allow six months for a pension transfer to happen²².

If something goes wrong, there is a route to complain. A person who no longer has an interest in the scheme, or claims to be such a person, has six months beginning on the date their interest in the scheme stopped to apply under the dispute resolution procedure²³. In the case of a two-stage dispute resolution procedure, the scheme must reach a first stage decision within four months of receiving the application²³.

What happens if one of us dies before the pension share takes effect

The outcome depends on the arrangement in place. An earmarking order ceases to apply if the former spouse or civil partner dies before the member retires²⁰. Pension attachment payments end when the person who owns the pension dies or if the person receiving the pension payments remarries⁴.

For defined benefit pensions, if you die before taking the pension, the scheme will usually pay out a lump sum to your spouse or civil partner, typically two or three times your salary²⁴. Under the Armed Forces Pension Scheme 2015, if you die after leaving with a deferred pension before it comes into payment, your spouse or partner receives 62.5% of the deferred pension, paid for life, plus the deferred pension lump sum²⁵. If you die after your pension has come into payment, they receive 62.5% of the pension, paid for life, plus a lump sum equal to five years of pension minus any pension or lump sum previously received, only if death is within five years of drawing the pension²⁵. Under AFPS 05, the spouse or partner receives a pension for life worth 62.5% of the deferred pension and the deferred pension lump sum if death occurs after leaving service before the pension is in payment, or 62.5% of the pension if death occurs after the pension is in payment²⁶.

The Pension Protection Fund confirms that any member who would have been eligible for an increase to their compensation but has passed away would still be entitled to arrears due up to the date of death, and survivors receiving compensation will receive an increase to their payments²⁷.

How are pensions split in Scotland compared with England?

The territorial rules differ in one important way. In England, Wales and Northern Ireland, the total value of the pensions you have each built up is taken into account. In Scotland, it only applies to the pension you built up while you were married³⁰. Pension splitting in divorce works slightly differently in Scotland as only the pension amounts saved during your marriage are considered; anything saved early on in careers, before meeting, or after separating is excluded⁶.

In Scotland, a pension attachment arrangement only applies to lump sum payments, rather than pension income². If you live in Scotland, there are also some pension provisions for couples in common-law relationships³¹.

A valuation of benefits in relation to divorce or dissolution proceedings or a pension sharing order will not constitute a member's underpin date nor final underpin date under the Local Government Pension Scheme in Scotland³².

The wider tax picture also differs. Income tax rates in Scotland are different, which affects how much additional pension tax relief higher earners can reclaim³³. You pay the same tax as the rest of the UK on dividends³⁴. Those in Scotland who pay the intermediate, higher and advanced rates lose out on tax relief when choosing to save for retirement with a Lifetime ISA³⁵.

Will I have to stay in contact with my ex-partner after a pension share?

No. A pension sharing order does not mean you will have to maintain any contact with your ex-partner¹⁹. The share is transferred into a pension in your own name, and you deal with the scheme directly.

Offsetting also gives a clean break¹⁰. Earmarking or attachment orders do not. The downside of attachment orders is there is no clean break between the two parties, as the two are financially linked, potentially until one of them dies; the member retains control of the pension asset and decides when to take benefits⁷.

Can I take my share of the pension as cash straight away?

Not usually. A pension sharing order transfers a share into a pension in your own name, and you can normally only take money from it from normal minimum pension age. Where both you and your former partner have retired, pensions can still be split, however it will not be possible to take a share as a lump sum⁶.

Transfers can be made either in cash, where your old provider sells your investments and moves your money, or in specie, where the existing investments are moved across as they are³⁶. You can choose which pensions you want to combine and which you would like to keep separate; you do not have to consolidate them all²¹. Find out if transferring or combining your pensions is a good idea: you could save money or lose valuable benefits³⁷.

People pay tax on payments from pensions like other income, and people can access up to 25% of their pension savings tax-free³⁸. Pension drawdown allows you to keep your pension invested and draw out income as and when you wish; you can take out as much as you want, although this money will be subject to income tax²⁹.

Where to get free help

Free, impartial guidance is available. MoneyHelper, run by the Money and Pensions Service, covers making the most of your pension³⁷. Pension Wise offers free guidance on your pension options¹⁴. If a complaint about a scheme cannot be resolved, the Pensions Ombudsman handles disputes, and schemes must follow dispute resolution procedures with set deadlines²³.

If you are worried about money after a separation, the wider benefits system may help. Pensioners in material deprivation stood at 7% in England, 4% in Northern Ireland and 6% in Scotland in the three years to 2023³⁹. If you are deferring your State Pension, you can take a one-off arrears payment of up to 52 weeks, increased regular payments, or both⁴⁰. If you defer your full new State Pension for 78 weeks (18 months), you can backdate your claim by 12 months and get a one-off arrears payment of £12,547.60⁴⁰. The state pension generally stops upon an individual's death and the enhanced payments earned through deferral typically cannot be passed on⁴¹.