When divorcing or dissolving a civil partnership, pension offsetting is one option. This can be good for people wanting a clean break.

Someone who has built up a pension might agree that they keep it, in exchange for giving the other person some cash and equity in the house to balance it out. It’s a really simple way to agree on things but can result in unfairness. If one person gets a house, this isn’t taxed in the same way as a pension. At present, a pension might only be accessible after the age of 55, and even then, there might be penalties for taking it ‘early’.

Offsetting orders are not affected by remarriage or death and could also be a good option for people with pension assets overseas, as these cannot be shared via a UK court order.

However, offsetting also runs the risk of leaving one person with little or no retirement pot. The process can also be difficult because the value of assets like pensions and property change over time. Getting a fair result for both parties from offsetting could be a challenge.

Since 1996, earmarking has been another option. A pension earmarking, or attachment order, can, once pension payments begin, redirect all or part of a private or work pension to an ex-spouse or civil partner.

An earmarking order could, for example, require someone to pay half of their pension income to the former spouse. This can be a good option to ensure someone receives continued financial support after a divorce.

However, there are several drawbacks to earmarking. The main drawback is the lack of control the recipient has. If the former partner were to die, this might reduce what they get or stop the income completely. Also, unless there is a clear agreement over when the pension starts, if their ex-partner delays taking the pension, there would be a significant impact.

There are also drawbacks in terms of taxation. If the person getting the pension is a higher rate taxpayer, the pension will be taxed at this rate even if it is subsequently paid on to an ex-partner, who would be a basic rate or nil rate taxpayer.

Earmarking does not offer a clean break and financial ties could last for many years.

Since being introduced in 2000, pension sharing has become a more common course of action for dealing with pensions during a divorce. A court issues a pension sharing order which states how much of the pension the ex-spouse is entitled to receive. Couples agree to a split of pensions on a percentage basis.

For example, if one party has no pension and the other has built up a significant amount, the latter could agree to share 50 per cent with the other party. The person receiving the pension share will in most cases then ‘transfer out’ to their own pension, but in rare cases, they are able to join the scheme as a ‘shadow’ member.

Valuations for pensions can be complicated, particularly if pensions are different types or the divorcing couple are very different in age. It is a more complex option, with a report calculating options for sharing sometimes required, and therefore more cost involved, but can deliver greater fairness if done correctly.

The benefit of sharing is that it achieves a clean break by splitting the pension at the time of divorce, with each party receiving their share independently. Remarriage or death will not affect the court order.

If a pension is subject to a pension sharing order, the pension scheme or pension provider has up to four months to implement or carry out the order from the time when they receive all the necessary information. However, they should do it within a reasonable time frame.

Tim Blowers specialises in Financial Planning on Divorce, is a Chartered Financial Planner and Associate of Resolution. Please get in touch to discuss, this can start with a free initial 30-minute call to understand how we might help.