The plan will enable the courts to treat pension rights like any other assets when dividing property between divorcing couples.
The Government estimates that up to 50,000 people a year, mostly women, could benefit.
"Pension sharing" would enable the transfer of all, or a proportion, of a husband's pension rights wholly to his soon-to-be-former wife, ensuring a "clean break" settlement and a decent retirement income for the woman.
The plan builds on consultation by the previous Tory government which produced broad consensus that pension sharing was the way forward, though the system may not be fully in place until 2000.
Harriet Harman, Secretary of State for Social Security and Minister for Women, said: "Many women face poverty in retirement after divorce, despite the contribution they have made to their husband's pension. We are giving women a fair share of pension on divorce.
"This is an important step towards fairness and security in retirement for women and it is part of reforming pensions."
Women are generally much poorer than men in retirement, and often lose out after divorce because of inadequate arrangements for splitting pension rights.
Ms Harman said the proposals recognised the wife's contribution to her husband's pension rights by caring for children and the home, enabling him to work and build up a healthy second pension.
Research in 1995 found men were four times as likely as women to have "substantial" pension rights on divorce - defined as five or more years' contributions to an occupational pension.
The idea of pension sharing was first raised by the Law Commission in 1969. It has attracted more attention recently partly because the divorce rate in England and Wales more than doubled - from 74,000 a year to 155,000 - between 1971 and 1995, and trebled in Scotland over the same period, to 12,000 a year.
Pension rights are one of the most valuable assets owned by many divorcing couples.
The consultation document notes that 19 million workers - more than three- quarters of the number in work - are building up funds in either an occupational or personal pension scheme, and the value of those funds now exceeds pounds 800bn.
But, unlike nearly all other assets, divorcing couples cannot split pension rights between them.
The law has been changed to make some progress towards a fairer division of pension rights, but the provisions have drawbacks and are not much used. Since the 1970s, courts have had to take account of the value of rights to offset them against other assets in financial settlements, or "ear-mark" them for maintenance payments once the pension starts being paid.
The pension sharing proposal would not be mandatory, but would enable some or all of a spouse's pension rights to be transferred to the other spouse on divorce, giving that person rights to a second pension of their own, not dependent on the circumstances of the former partner.
It will be available for occupational and personal pensions, and the State Earnings Related Pension Scheme (Serps).
The Commons social security select committee will take evidence on the proposals. Legislation is likely to be introduced by the end of this year.