Table of contents:
- What is a pension sharing order and how do I apply for one?
- What happens next?
- When is pension sharing a good idea?
- Negligence in divorces
- FAQs on pension sharing
- Useful links
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 off the most up-to-date valuations. Someone will work all of that out for you.
However, what you need to know is 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)
When is pension sharing a good idea?
Pension sharing might be a good option for your 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 pensions 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
Negligence in divorces
Even though pension sharing was introduced in 2000, divorces settled since have been mishandled and the value of pensions misunderstood. It is not uncommon to hear of cases that didn’t fully investigate the true value of all the pensions available to each spouse.
As such, there are occasions where you could have a claim for negligence against your legal representative if they didn’t secure the necessary expert advice, or properly advise you about the options before a financial settlement was reached in your divorce.
No-one deserves to be given the wrong advice during a divorce settlement. If you feel like you were, we can help. Although you might think it’s difficult to raise a dispute with a professional, Pinnington Law can alleviate any further trauma and help you settle your case, drawing on our expertise as a specialist family law practice.
FAQs on pension sharing
Can you do pension sharing without a court order?
No – it is not possible to arrange pension sharing without applying for the court order.
Can you apply for a pension sharing order if you’re not married or in a civil partnership?
Pension sharing is not an option for couples who have just been living together.
Is pension sharing compulsory?
Divorce pension sharing was introduced in December 2000. Before then, a spouse who hadn’t worked during the marriage might be left without any pension entitlement after a divorce. Now pensions are included as marital assets, divorcing couples must decide how to include the value of all their pensions in the settlement. But pension sharing is not compulsory, and is just one of the three options available to you.
Does pension sharing apply to pensions built up prior to marriage?
In England and Wales, all pension assets belonging to the couple are taken into account. But in Scotland, only pension assets built up during the period of marriage or civil partnership are considered.
Does anything change if either party remarries or dies?
If the original pension holder dies or remarries, there won’t be any consequences for the receiving party as pension sharing creates a clean break between the parties’ pension arrangements.
Likewise, if the receiving party remarries or dies there are no consequences. They will receive the same rights and benefits within the pension scheme as the original member.
When is the money transferred?
Although a pension sharing order cannot take effect during a divorce procedure until the decree absolute is granted, the provider of the pension arrangement then has another four months in which to implement the pension credit. This time starts from the day the order takes effect or the day they receive the documents from court, if that’s later.
Will the pension provider charge?
Typically, yes. Within 21 days of the pension provider receiving the pension sharing order, they should contact both parties with more information on the charges associated with pension transfer.
Can you help?
Yes. At Pinnington Law, we understand that the breakdown of a relationship is difficult. We’ll always ensure your case is dealt with swiftly, sensitively and cost-effectively. Contact us to discuss your requirements – we have experience providing legal advice on all aspects of family and divorce law, as well as professional negligence.
Call 0161 503 5476 or email [email protected]
You no doubt have a much better understanding of pension sharing orders at this point – but might still need clarity on some aspects. Make use of this fantastic resource of secondary material to fully comprehend the system and how it operates.
- Divorce Online offer a valuable resource on fully comprehending a shared pension
- In this PDF, Gov.uk highlight how the splitting up of a shared state pension is carried out after a divorce, or separation from a civil partnership
- Moneywise discuss some of the financial benefits you can experience when you’re over 50 (some of which pertain to pensions)
- The Pension Advisory Service take an in-depth look at how pension sharing works, and the repercussions
- Pension Wise (a government service to make pension-related matters clearer) discuss how courts deal with pensions when a couple separates
- Pruadviser demonstrate how a pension share will be valued according to the assets of both parties, in the interest of fairness
- Royal London explain the pension types which can and can’t be shared.