The Hidden Risks of Pension Splits: What Every Divorce Solicitor Needs to Know

Pensions are often one of the most valuable assets in a divorce, yet according to research by Legal & General (6 January 2025), just 13% of couples include pensions in their settlement. Moreover, 23% actively waive their rights to the value of their pensions.

Unfortunately, failing to consider pensions when separating could negatively affect your divorcing clients’ long-term financial security.

As such, you could play a crucial role in helping your clients understand their options and achieve a better outcome – while also minimising your risks as a solicitor.

Keep reading to learn how different pensions work and some potential issues to look out for when supporting individuals to review and split these important assets during a divorce.

How the different types of pensions work

There are two main types of workplace and private pensions your divorcing clients may have.

Understanding the differences between these schemes and the relative merits of each could help your clients make informed decisions about how to divide these assets on divorce.

Defined benefit pensions

If your client has a defined benefit (DB) pension, the amount they’re paid will depend on how many years they have been a member of the employer’s scheme and how much their salary was when they left or retired.

DB pensions include:

• Final salary
• Career average
• Public sector schemes.

A significant benefit of this type of pension is that it normally provides a guaranteed income for life (after 55, rising to 57 from April 2028) which usually increases each year in line with inflation.

Additionally, many DB pensions include survivor benefits to a spouse or civil partner if the scheme member dies – often in the form of a spouse’s pension.

While this type of pension is becoming less common, divorcing clients who currently or previously worked for a large employer or in the public sector may be more likely to belong to such a scheme.

When splitting a DB pension, the court will use a Cash Equivalent Transfer Value (CETV) – obtained from the pension provider – to decide how the pensions should be divided.

If you have clients whose CETV exceeds £30,000, it is compulsory that they seek financial advice before transferring their pension.

Defined contribution pensions

Defined contribution (DC) pensions are the most common type of workplace or private pension.

DC pensions include:

• Money purchase
• Personal pensions
• Group personal pensions
• Self-invested personal pensions (SIPPs)
• Small self-administered schemes (SSAS).

Unlike DB pensions, there is no guaranteed income. The amount your clients could receive during retirement will depend on factors such as how much they have paid in and how well the scheme’s investments have performed.

Most people can access their DC pension at 55 (rising to 57 in 2028), at which point they can opt for:

• An annuity – Your clients could use some or all of their pension pot to buy an annuity. This provides a regular income for life, regardless of investment performance.
• Flexi-access drawdown – Your client withdraws funds from their pension as needed, and the remaining funds continue to be invested.

Common pension problems your divorcing clients may face

As a financial expert who specialises in divorce, I have seen the same problems with pensions on divorce arise time and again.

While each individual has unique circumstances, challenges, and aspirations, here are the most common issues that divorcing clients often face:

• Not understanding what pensions they have or how different types of schemes work
• Excluding pensions from a divorce settlement because they did not know this was an option
• Agreeing to an unfair separation of pension assets due to a lack of understanding or pressure from their ex-spouse
• Opting to remain in the family home in exchange for waiving their rights to pension assets (this could provide short-term stability but jeopardise long-term security)
• Failing to obtain an actuary report when it is necessary or beneficial to do so. For example, if there is a DB pension, a pension with a guaranteed annuity rate (GAR), a pension with a Guaranteed Minimum Pension (GMP), or a significant age difference between the divorcing parties.
• Making key decisions without seeking expert financial advice.

Being aware of these issues could help reduce your risk of making mistakes with pensions on divorce, missing something important, or allowing your clients to make mistakes they regret.

Read more: 4 compelling reasons why divorce solicitors need to work with a financial expert

Important factors to look out for when reviewing pension assets during divorce

In addition to the above, there are several key things to watch out for when supporting clients to share their pension assets during divorce.

Defined benefit pensions

One key consideration is whether the DB pension is linked to any other schemes, such as a DC pension.

While a single Pension Sharing Order (PSO) could cover both, if the schemes are managed by different providers or the division of benefits is complex, your clients may need a PSO for each one.

It’s also crucial to obtain a CETV to ascertain the value of any DB pension held by your clients or their spouses. Bear in mind the following rules:

• Your clients can only request a CETV once every 12 months; the figure provided will remain the same for this period.
• Your clients must be at least 55 years old to release cash from their CETV.
• As mentioned above, if your clients’ CETV exceeds £30,000, they are legally required to obtain financial advice.

Additionally, obtaining a detailed Pension Actuary Report is usually advisable for divorcing clients who want to split a DB pension.

Defined contribution pensions

If your clients have a DC pension to split, it’s important to identify:

• Whether there are any GARs available to them – These could boost the value of your clients’ pensions but they may be lost on transfer.
• If a GMP applies – Certain occupational pension schemes may provide this if they were contracted out of the State Earnings Related Pension Scheme (SERPS) between 6 April 1978 and 5 April 1997.
• Any scheme-specific protected tax-free cash (SSPTFC) entitlements – These are available to some people who had an entitlement to tax-free cash from their scheme in excess of 25% as of 5 April 2006. However, your clients may lose SSPTFC entitlements if they transfer their pensions.
• Transfer penalties – Some schemes have transfer or “exit” penalties which could reduce the amount your clients receive if their ex-spouse or partner transfers pension assets to them.
• Whether pension pots are crystallised or uncrystallised – If your clients have already accessed their pensions (a “crystallised” pension), they’ll have to transfer the full amount, as partial transfers are not allowed. This could also limit tax-free cash options for the receiving spouse or partner. In contrast, transfers from uncrystallised pensions may offer greater flexibility for retirement planning.
• Underlying assets and investments – The type of assets a pension is invested in could affect how much freedom your clients have to manage their funds.

Get in touch

As a financial expert who specialises in divorce, I can help you save time, minimise your risks, and achieve better outcomes for your clients.

So, if you have clients who feel uncertain about how to split their pensions on divorce, I’d love to hear from you.

Please contact me at lottie@truefinancialdesign.co.uk or call 03300889138.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

The Financial Conduct Authority does not regulate tax planning.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.  

Workplace pensions are regulated by The Pension Regulator.