Pension Sharing on Divorce: How Drawdown Is Affected

Why Pensions Matter in Divorce

Pensions are often the second most valuable asset in a divorce after the family home – and in some cases, they're worth even more. Yet many people underestimate how significantly divorce can affect their pension drawdown plans, or they overlook pensions entirely during settlement negotiations.

Understanding how pension sharing works, what options are available, and how it interacts with drawdown is essential for anyone going through or contemplating divorce. The decisions made during this process can affect retirement income for decades.

The Three Options for Pensions on Divorce

When a marriage or civil partnership ends, there are three main ways pensions can be dealt with:

1. Pension Sharing Order

A pension sharing order transfers a percentage of one person's pension to the other. This is the cleanest split because it gives each party their own independent pension pot. Key features include:

• A percentage (not a fixed amount) is transferred
• The receiving party gets their own pension rights, completely separate from their ex-spouse
• Once implemented, neither party's pension decisions affect the other
• The transfer is usually tax-free
• It can apply to pensions already in drawdown

Pension sharing orders can only be made by a court as part of divorce proceedings – they cannot be arranged privately or informally.

2. Pension Offsetting

Rather than splitting the pension itself, offsetting involves balancing pension value against other assets. For example, one spouse keeps their full pension while the other receives a larger share of the house or other savings.

The challenge with offsetting is accurately valuing a pension against other assets. A £200,000 pension pot and £200,000 in cash are not equivalent – the pension is subject to tax on withdrawal, can't be accessed until minimum pension age, and carries investment risk. Many experts argue that pensions are systematically undervalued in offsetting arrangements.

3. Pension Attachment Order (Earmarking)

An attachment order requires the pension scheme to pay a portion of the pension income (and potentially lump sums) to the ex-spouse when it comes into payment. This is less common because:

• The receiving spouse depends on the pension holder's decisions about when and how to draw their pension
• Payments stop if the pension holder dies or if the receiving spouse remarries
• It creates an ongoing financial link between ex-spouses
• The pension holder can delay taking benefits, effectively controlling their ex-spouse's income

For these reasons, pension sharing orders are generally preferred by the courts and legal professionals.

How Pension Sharing Affects Drawdown

If You're Already in Drawdown

If your pension is already in flexi-access drawdown when a pension sharing order is made, the process becomes more complex. The pension scheme must:

• Calculate the value of your drawdown fund at the relevant date
• Apply the sharing percentage to that value
• Either transfer the share to another scheme or create a separate arrangement within the same scheme

During this process, your ability to make withdrawals may be restricted. Some providers freeze the account temporarily while the sharing order is implemented, which can disrupt your income if you rely on regular drawdown payments.

Impact on Your Drawdown Income

A pension sharing order directly reduces your pension pot, which in turn reduces the income your fund can sustain. Consider this example:

• Pre-divorce drawdown fund: £400,000
• Pension sharing order: 50% to ex-spouse
• Post-divorce drawdown fund: £200,000
• Previous sustainable income at 4%: £16,000/year
• Post-sharing sustainable income at 4%: £8,000/year

This halving of income potential underscores why pension sharing orders require careful consideration alongside other aspects of the financial settlement. Understanding concepts like the safe withdrawal rate becomes even more important when working with a reduced pot.

Tax-Free Cash Considerations

If you've already taken your 25% tax-free cash before the pension sharing order, the remaining fund is entirely taxable on withdrawal. Your ex-spouse, however, may receive their share with tax-free cash rights intact – they can potentially take 25% of their share tax-free. This asymmetry is worth understanding during negotiations.

Valuing Pensions for Divorce

Cash Equivalent Transfer Value (CETV)

For defined contribution pensions (including most drawdown arrangements), the CETV is usually straightforward – it's the fund value. However, the CETV doesn't capture:

• The tax that will be paid on withdrawals
• The charges applied by the pension provider
• Any guarantees attached to the pension (such as guaranteed annuity rates)
• The true economic value of future growth potential

Defined Benefit Pensions

If one or both spouses have defined benefit (final salary) pensions alongside drawdown arrangements, valuation becomes significantly more complex. A Pension on Divorce Expert (PODE) actuary may be needed to provide fair valuations and recommend appropriate sharing percentages.

State Pension

The State Pension cannot be shared through a pension sharing order. However, some people may have built up additional State Pension (SERPS or S2P) that can be shared. Understanding State Pension entitlements for both parties is important in the overall settlement picture.

Receiving a Pension Share

If you're the person receiving a pension share, you have important decisions to make:

Internal vs External Transfer

You can usually choose to:

• Stay with the same provider – A separate arrangement is created within your ex-spouse's scheme (known as an "internal transfer")
• Transfer to another provider – Move the money to a pension scheme of your choice

Transferring externally is often preferred because it creates complete separation from your ex-spouse's arrangements. It also lets you choose a provider that suits your needs, potentially with lower drawdown fees.

What You Can Do With Your Pension Share

A pension share received in divorce is treated like any other pension. You can:

• Leave it invested until you need it
• Take 25% as tax-free cash
• Enter drawdown and take flexible income
• Buy an annuity for guaranteed income
• Take the whole amount if you're over 55 (though tax implications may be significant)
• Combine it with any existing pensions through consolidation

The Timeline and Process

Understanding the practical steps helps manage expectations:

1. Disclosure – Both parties provide full details of all pension arrangements, including current values
2. Valuation – Pensions are valued, potentially with actuarial input for complex cases
3. Negotiation – The pension sharing percentage is agreed or determined by the court
4. Court order – The pension sharing order is included in the financial consent order
5. Decree absolute / Final order – The pension sharing order becomes effective (not before)
6. Implementation – The pension provider processes the share, typically within 4-6 months

The entire process from disclosure to implementation can take 12-18 months or longer. During this time, pension values may fluctuate, which is why percentage shares (rather than fixed amounts) are used.

Costs Involved

Pension sharing orders involve several costs:

• Actuarial reports – £500-£1,500+ per pension, essential for defined benefit schemes
• Legal fees – Varies widely, but financial orders add to overall divorce costs
• Pension provider charges – Most providers charge £1,000-£3,000+ to implement a sharing order
• Transfer costs – If moving the pension share to a new provider, there may be additional charges

These costs are often split between the parties, though this can be negotiated as part of the overall settlement.

Common Pitfalls in Pension Sharing

Ignoring Pensions Entirely

Some couples, particularly those divorcing at younger ages, overlook pensions. This can leave one party – often the lower earner who may have taken career breaks – significantly worse off in retirement.

Accepting a "Clean Break" Too Quickly

The desire for a quick, clean break sometimes leads people to accept unfavourable pension arrangements. A short-term wish to be "done with it" can translate into decades of reduced retirement income.

Not Understanding Tax Implications

A £200,000 pension share is not the same as £200,000 in savings. After tax (potentially at the basic or higher rate), the spendable amount is significantly less. This should be factored into any offsetting calculations.

Forgetting About Death Benefits

Drawdown pensions can be passed on to beneficiaries. After divorce, it's essential to update your death benefit nominations. Otherwise, your ex-spouse may still be the nominated beneficiary, and while providers aren't obligated to follow nominations, it creates unnecessary complexity.

Not Updating Your Drawdown Strategy

After a pension sharing order reduces your fund, your previous withdrawal strategy may no longer be sustainable. Reviewing your drawdown strategy and adjusting income expectations is essential.

Cohabitation and Pensions

It's worth noting that cohabiting couples who separate have no automatic right to pension sharing. Pension sharing orders are only available through divorce or dissolution of civil partnership proceedings. This means unmarried partners have no legal claim on each other's pensions, regardless of the length of the relationship.

Rebuilding Your Pension After Divorce

If your pension has been reduced by a sharing order, strategies for rebuilding might include:

• Maximising contributions – Using available annual allowance (currently £60,000 or 100% of earnings, whichever is lower)
• Carry forward – Using unused allowance from the previous three tax years
• Employer contributions – Ensuring you're maximising any employer matching
• Reviewing investment strategy – A smaller pot may require different risk parameters
• Delaying retirement – More time for the reduced pot to grow
• Considering working longer – Even part-time work extends pension accumulation

When to Get Professional Help

Given the complexity and long-term consequences, professional advice is particularly important when:

• Either party has a defined benefit pension
• There are multiple pension arrangements
• One party is already in drawdown
• The pension values are substantial relative to other assets
• There's a significant age gap between the spouses
• Either party plans to retire soon

A financial adviser specialising in pensions on divorce can work alongside your solicitor to ensure pension arrangements are handled appropriately.

The Bottom Line

Pension sharing on divorce is one of the most consequential financial decisions many people will face. For those in or approaching drawdown, the impact on retirement income can be profound. Understanding the options, getting proper valuations, and making informed decisions during what is often an emotionally difficult time is crucial.

The rules around pension sharing are complex, and mistakes can be irreversible. Rushing the process or accepting arrangements without understanding the long-term implications can leave lasting financial consequences.

Speak to a qualified financial adviser and a solicitor experienced in financial orders for guidance tailored to your situation.

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