Dividing Pensions in Divorce: Offsetting, Earmarking, and Pension Sharing Explained

When a marriage or civil partnership ends, dividing assets like the family home or savings is usually top of mind. But pensions are often overlooked, despite being one of the most valuable assets in a relationship. This post explains how pensions can be split on divorce, including the key methods and their pros and cons. This is useful reading as part of your preparation for the CII R04 or J05 exams.

This article is correct as at 29 April 2025.

Why Pensions Matter in a Divorce

When a marriage (or civil partnership) is dissolved, it is usual for a formal legal agreement to be drawn up to dictate the split of the matrimonial assets. Commonly, this involves the marital home, vehicles and cash in bank accounts as well as any single or jointly held assets.

However, there is a less well known but still very important consideration, which is the splitting of pension entitlements. These are often the biggest assets held within a marriage apart from, and sometimes including, the marital home.

How Pension Assets Are Valued

Placing a value on a defined contribution plan is straightforward, whereas a defined benefit scheme is generally valued on an actuarial basis by establishing a cash equivalent transfer value.

Three Main Ways to Split Pensions

There are three main methods to deal with a pension in the event of divorce.

1. Offsetting: Keeping Your Own Pensions

By far the most straightforward is offsetting. This relies on there being sufficient other assets within the marriage to make it work. However, quite simply, each party keeps their pensions, with the other assets of the marriage split in such a manner as to make the overall share even (or keep it in line with any other split determine by the courts if not done on a 50/50 basis).

2. Earmarking Orders: Sharing Future Payments

Where offsetting is not possible or desirable then a pensions attachment (or ‘earmarking’ order) may be established. In its simplest terms, this means that a portion of one party’s pension is earmarked for the use of the other at the time it comes into payment. There are two main types of earmarking – an earmarked lump sum order and an earmarked periodic payments order.

It is important to note that earmarking is not usually considered an ideal option for a number of reasons. Mainly that it is inconsistent with the principle of a clean break on divorce as it requires the parties to stay in contact. Also, it provides no clarity for the ex-spouse as they do not have control over investment or vesting decisions within the pension as they can only start to receive benefits once the member starts to take them.

In addition, earmarked periodic payment rights may be lost in the event that the member dies, or the ex-spouse remarries. Tax treatment can also be complex as the pensions are taxed as the full property of the member and tested against the member’s lump sum allowance (and previously their lifetime allowance) rather than being based on who actually receives the payment.

3. Pension Sharing Orders: A Clean Break

In order to address this, the Welfare, Pensions and Reform Act 1999 introduced the concept of a Pension Sharing Order. This allowed for an immediate splitting of the relevant pension entitlement between the two parties, with each immediately entitle to use their own share how they see fit.

With a defined contribution scheme, the ex-spouse receives a pension credit. They can then transfer the credited funds into their own pension scheme to invest and use as they see fit.

Defined Contribution vs Defined Benefit Schemes

Define benefit schemes can offer two options. Firstly, a cash equivalent transfer value, which they are required to offer. This simply allows the ex-spouse to take a cash lump sum actuarially equivalent to the value of their share of the pension. Again, this can be transferred to a personal pension to invest and use as they wish.

The second option is a shadow membership. Schemes are not obliged to offer this option and, indeed, many do not. This option basically sees the ex-spouse become an effective member of the scheme with an entitlement in their own name. The exception being unfunded public sector schemes, which are required to offer a shadow membership but will not generally offer a cash equivalent transfer value.

What CII Candidates Should Know

R04 candidates can usually expect a divorce-related question or two and they have also come up in J05 on a number of occasions. A basic knowledge of the features, advantages and drawbacks of each would be strongly recommended.

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