Your pension is likely to be your second most valuable asset, if not your first if you don't own your house or your policy is of high worth. Either way, you need to make sure it's not ignored in any divorce settlement.

Divorce and pensions legislation
Various pieces of legislation cover the issue of pension and divorce, most notably that the court must allow for a clean break settlement wherever possible and that they must take pension rights into account when assessing assets.

The principle of earmarking future pension payments for the spouse with the least pension rights was introduced by the 1995 Pensions Act. This also marked the beginning of using cash equivalent transfer values (CETVs) to calculate how much the pension was worth at the time of divorce. From December 2000 divorced parties were also given provision to share or split the pension benefits on divorce to promote the principle of a clean break. Offsetting and earmarking are still options and it is still in the legislation that divorce settlements should cover pension benefits. There is however, little protection for partners who live together, something which campaigners continue to try and address.

Cash equivalent transfer value (CETV)
A cash equivalent transfer value, or CETV, is used in a lot of the options divorced parties can take to address pension rights in a settlement. It is calculated from the anticipated cost of funding pension benefits to a policy holder. With money purchase benefit schemes, it is the total of member contributions, plus payments made on behalf of a member and any investment profits.

The calculation of the CETV for defined benefit schemes is more complicated. It takes into account actuarial assumptions regarding likely future events which may affect the benefits and the scheme as a whole.

What is pension sharing?
Pension sharing is perhaps the most common process to manage pensions in divorce settlements, except for basic state pensions where it doesn't apply.

It is where a divorcing party can petition to have a proportion of the cash equivalent transfer value (CETV) of their ex-spouse's pension, once it has been calculated, transferred to their own scheme. Alternatively, they can use it to become a member of their ex-spouse's company pension scheme. This option isn't often used however as it involves increased administration and bigger costs to manage extra, non-employee members.

Pension sharing rules mean the pension schemes can instead buy out the petitioner's benefits and most schemes will make use of this option, except government employee schemes as these have bigger CETVs.

Pensions that are already being paid out, such as through an annuity, can be unbought, shared between the pension member and the petitioner, then rebought with the annuity values at the time of the divorce. The petitioner can then then put this towards a pension of their own as a one-off payment. This may be a good option if the petitioner is younger.

The main disadvantage of pension sharing is that schemes can charge significant administration fees for calculations and dividing the benefits. The petitioner should also look at how much financial advice will cost. The combined expense may end up outweighing the benefits.

What is offsetting?
Once the value of a pension is calculated for the purposes of a divorce settlement, the parties involved can opt for an offsetting arrangement. This is the process of taking the value of the pension and giving the party with the least benefits alternate assets within the settlement to make up for their loss of pension rights.

The advantage of offsetting is in its simplicity, but it means that adequate alternate funds need to be available elsewhere in the divorce settlement, so not many people are able to make use of it.

What is earmarking?
A divorcing party can petition to have some of their ex-spouse's pension benefits paid to them when the pension is taken. The divorce court can ringfence a specified percentage of the pensioned party's benefits for the petitioning ex-spouse. Death in service lump sums and widow(er)'s pension benefits can also be treated in this way. It can only apply to private pensions however.

The main disadvantage of earmarking is that the pensioned party retains full control of what happens within the scheme and their ex-spouse is powerless to do anything in the event that they don't retire or that they make bad investments. In addition, the earmarking ends if the petitioning party remarries. The petitioner also pays the same rate of tax as the pensioner, even if that rate is higher and it doesn't apply to the petitioner.

Earmarking is done through an attachment order to the pension issued by the court. This obliges the scheme to pay out to the petitioner. But if the petitioner remarries before the pensioned party retires then the process will have been for nothing.

Summary
When offsetting isn't possible, pension sharing will be the most commonly used route to manage pension rights in divorce cases. But this will come at a cost attached to breaking old arrangements and setting up a new scheme, which has to be weighed up against the value of the transfer.

Please keep in mind that a pension is a long-term investment and the value can go down as well as up. Your final income will be determined by the size of the fund, interest rates and tax legislation.

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