What is a pension sharing order and how do I apply for one?
What happens next?
When is pension sharing a good idea? Divorce is a stressful time. The end of any relationship is difficult, both emotionally and practically. Dividing up the assets you share as a married couple is one of the toughest parts of a separation.
Anything you have under a shared name must be considered. Your assets could include property, money in the bank, and pensions. Since divorce pension sharing was introduced in December 2000, pensions must be included in a divorce settlement. In other words, pensions are part of the total value of marital assets you share.
However, pension sharing isn’t always the first thing divorcing couples think of. Typically, most people focus on what will happen to the family home. But pensions are a huge asset and important when planning your future – so deciding what to do with them is extremely important.
There are three options for dividing up pensions as part of a divorce:
Sharing - Pension sharing is a formal agreement to divide your pension assets at the time of divorce. The courts work out exact percentages and the receiving party can become a member of the pension scheme or transfer the value to a new pension provider
Offsetting - The value of the pension is offset against other assets. For example, one spouse keeps their entire pension, and the other is given alternative assets (e.g. property or cash) of the same value
Earmarking - All, or part, of the pension is earmarked to be paid to one party when the other starts to draw pension benefits. There is no legal transfer of ownership
This guide will talk specifically on pension sharing. It’s a good option for many people because you can make a clean break from your ex-partner. Once pensions are divided up or a new pension is created for the receiving spouse, you don’t have to worry about it again.
What is a pension sharing order and how do I apply for one ?
If you’ve decided pension sharing is the right option for you, it’s important to know it can only happen with a court order. The pension sharing order sets out how much of a pension(s) will be given to you or your ex-spouse. This makes pensions different to other marital assets, such as the family home – which can be transferred to one spouse or the other. This may be agreed between both parties and recorded through solicitors without going to court.
So why can’t the same be done for pensions? Well, pension providers or pension schemes cannot carry, divide or transfer any pension without instruction from the court. That doesn’t mean you’ll spend any time stood up in a courtroom, though.
Once your marital assets have been assessed, the court will award a percentage of one party’s pension value to the other person. The amount awarded is referred to as a pension credit, and the amount deducted from the other party is known as a pension debt.
Most cases aren’t contested, as people come to an agreement through their solicitors. That means you only need a consent order from the court for the pension scheme provider to be able to make the necessary changes. In these cases, the application for a financial court order is usually concluded quickly and the pension sharing order granted.
What happens next?
The exact amount of the pension credit won’t be known until the court order is finalised. When this happens, the amount to be transferred should be a percentage of the cash equivalent transfer value (CETV).
This is where it can get a bit confusing, as the CETV can change over time – even within the time it takes to finalise a divorce. It changes in value because of moves in the stock market, making it important when negotiating a pension share to work from the most up-to-date valuations. Someone will work all of that out for you.
However, what you need to know is that the ex-partner will always be entitled to a pension credit equal to the value of the pension debit. In other words, there’s no difference in what is lost and what is gained. But the pension won’t be shared as an exact 50/50 split. Normally, the aim is to ensure equal incomes in retirement, taking into account the other assets.
There are two ways a pension share can be received:
The receiving party can become a member of their ex-spouse’s scheme in their own right (internal transfer)
The receiving party can transfer the value to another pension arrangement in their own name (external transfer)
Whatever you decide to do, after the sharing order comes into effect, the receiving party owns the pension in their own right and can manage it how they want.
When is pension sharing a good idea?
Pension sharing might be a good option for you if:
One party has high value pensions, compared to the other assets
You’re close to retirement age and will find it difficult to build up similar pension benefits in a short time
You’re thinking of remarrying soon, as the pension sharing order cannot be changed at a later date
The divorcing couple is older. Under current rules, you can take benefits from the pension credit from when you’re 50, rather than waiting until your ex retires
You’d like to be able to nominate potential beneficiaries of any death benefits if you were to die before taking retirement benefits
Overall, pension sharing offers a clean break and provides greater flexibility and choice to the divorcing couple. The involvement of the courts also assists in making sure there’s a fair settlement of marital assets.
However, pension sharing might not be the best option if keeping the family home is a key priority for you. Pension sharing means you might have to share other assets, including the home, meaning it might have to be sold. Also, it might not be the first choice for those with an adequate pension already. If you’re unsure what to do, contact us to discuss your requirements.
It’s also important to remember not all pension can be shared:
Occupational pension schemes (including AVCs) – Yes
Personal pension schemes – Yes
Stakeholder pension schemes – Yes
S.32 policies – Yes
Retirement annuity contracts – Yes
Statutory pension schemes – Yes
Free-standing AVCs – Yes
Employer financed retirement benefit schemes – unapproved schemes – Yes
Contracted-out benefits, State Second Pension (S2P) and State Earnings Related Pension (SERPS) – Yes
Pensions in payment from any of the above – Yes
Schemes in which the only benefits are equivalent pension benefits – No
Basic state pension – No
New state pension – No
Pensions the member is receiving as a spouse, civil partner or dependant – No
Pensions already subject to an earmarking or sharing order – No
Source: Pinington Law
Should you receive a Pension Sharing Order in a divorce settlement it would be advisable to seek professional financial advice as you may need to set up a “pension shell” for your pension settlement to be paid into.