Pension sharing orders and divorce
Find out what a pension sharing order is and how a financial planner can work with you when going through a divorce
What is a pension sharing order?
A pension sharing order is a court order that states what percentage of a person’s pension should be shared with their ex-husband or ex-wife as part of a divorce settlement. It creates a ‘debit’ in one person’s pension fund value and a ‘credit’ for their former partner.
The main advantage of a pension sharing order is that it gives everyone a clean break – it helps to ensure that both people have pensions for their retirement, and the pension sharing order is not impacted by a potential change in future circumstances, such as a remarriage or a death.
How is a pension sharing order calculated during a divorce?
All pensions belonging to you and your ex-husband or ex-wife must be valued. Defined benefit pensions (also known as final salary pensions) are valued differently to defined contribution pensions (commonly referred to as personal, individual or workplace pensions). The pension scheme administrator or provider will confirm the value of the pension for you. State pension provision, or a lack of it, is also included in this calculation.
Your solicitor will then work with a pension expert, an actuary or specialist financial planner to establish how the different types of pensions could be shared between you both and what the appropriate pension share percentage should be. Using a specialist financial planner here is important because as well as calculating the value of the pension(s) to be shared, they can also take into account the impact of the pension lifetime allowance on both parties and consider the implementation of the pension sharing order and the practicalities of this.
What impact does a divorce have on the pension lifetime allowance?
In the context of a divorce settlement, pension offsetting or earmarking will not have any direct effect on the pension lifetime allowance for anyone involved. On the other hand, a pension sharing order can have an impact on the lifetime allowance for yourself as well as your ex-husband or ex-wife. In some circumstances, a person who receives a pension credit from a pension sharing order can apply for an enhancement to their lifetime allowance. A financial planner can advise in this extremely complex area so that you are not presented with an unnecessary tax bill at what is already an extremely stressful time.
How should a pension sharing order be implemented?
Although a pension sharing order confirms the percentage of the pension to be transferred, it doesn’t state how the arrangement should be implemented. If you are receiving a percentage of the value of your ex-husband or ex-wife’s pension, a financial planner can work with you to decide on the best course of action for you and your family. This often depends on your individual circumstances, the type of pension being shared and whether there are any special features or benefits associated with it. Once this information is established, they can help you to decide whether to:
- Keep the credit within the existing pension scheme
- Transfer it to your existing pension
- Set up a new pension arrangement altogether
What happens to a pension sharing order following a conditional order?
Once a conditional order has been granted, all documents must be sent to the relevant pension provider. They will need to see copies of the court order (including the pension sharing annex), the final order of divorce and receive payment for their charges (if applicable). If there is to be an external transfer, the details of the receiving pension scheme. The pension provider has four months from the date of receiving the documents to implement the order.
Please note that in Scotland, a decree of divorce is granted instead of a decree absolute, decree nisi and a consent order. The decree of divorce and pension sharing agreement (registered and signed by the court) must be sent to the pension provider, along with the payment of any applicable charges and the details of the receiving pension scheme.
Can a pension sharing order be applied to a pension in payment?
A pension sharing order can be applied to a pension which is already in payment but the calculations involved are far more complex and any applicable charges tend to be higher.
Talk to Evelyn Partners
The experts at Evelyn Partners can help with all financial aspects of divorce, from dividing your assets to helping you see what your new financial future could look like. If you have any questions about pension sharing orders or your divorce in general, please book an initial consultation online or call us on 020 7189 2400.
Whilst considerable care has been taken to ensure the information contained within this document is accurate and up to date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.