When you split up from your spouse, there are usually three main ways to deal with any pensions you have.
Pension sharing is often a common way to ensure each partner ends up with retirement savings after divorce, especially if only one spouse has contributed to a pension. Pensions are split at the time of divorce or dissolution, giving each partner their own pension pot for the future and ensuring that both parties can have a clean break from each other. The partner who has the pension can either keep their share in their current pension scheme, or have it moved to another pension scheme of their choice. As this is a transfer and not a new contribution, it won’t soak up any of your Annual Allowance (the amount you can pay into your pension in a tax year and earn tax relief on.) The other partner can put their share into a personal pension of their choice.
The value of pensions is offset against other assets
Another option is for pension assets to be offset against other assets of the divorcing parties. For example, if you have a pension and your partner doesn’t, you could allocate assets of the same or similar value to the pension involved, to your partner and you keep the whole of the pension. Again, this allows both parties to have a clean break.
One of the problems you might come up against if you’re thinking of pension offsetting is that it can be difficult to value some assets and split them fairly, so you may need professional advice from a financial advisor to help you work this out.
Pension attachment order
A pension attachment order (known as a pension earmarking in Scotland) occurs when some, or all of the pension benefits of one partner are ordered to be paid to the other. These are only paid direct to the former spouse when the pension rights come into payment, so you’ll only receive a retirement income when your ex decides to retire.
The biggest challenge with this is that it can make it harder to plan financially, as you won’t be fully in control of your own pension income. You may want to take money on a different timescale to your pension partner. Another potential downside is that any payments will stop when the spouse or partner with the pension pot dies, or if the person receiving the earmarked pension remarries. Due to these complications, pension attachment orders or earmarking is rare, with most people opting for pension sharing instead.