Pensions & divorce - frequently asked questions
Pension assets may be included in a divorce agreement. Here we’ll answer some of our frequently asked questions.
What can the ex-spouse/civil partner do with a pension credit?
If the scheme does not allow the ex-spouse/civil partner to become a member, the transfer value can be paid to another pension plan that is willing to accept it.
If the rules of the receiving scheme allow it, the value could also be transferred to a scheme the ex-spouse/civil partner is already a member.
Is it possible to take tax-free cash from a pension credit?
Yes. Provided the pension credit originated from uncrystallised benefits. But if the pension credit originated from crystallised benefits such as an annuity, a defined benefit pension in payment or funds in drawdown, it is not possible for the ex-spouse/civil partner to take any tax-free cash. This is called a disqualifying pension credit.
Is it possible to apply for a pension sharing order when you are not married or in a civil partnership?
No. Pension sharing is only an option on divorce. It is not an option for unmarried couples or couples not in a civil partnership.
When giving advice on a pension credit coming from a defined benefit scheme, where the only option is a transfer out, are the pension transfer permissions needed?
No. As the ex-spouse/civil partner is not giving up any benefits in the defined benefit scheme, the pension transfer permissions are not needed.
Are there any pensions which can’t pay a pension credit to an ex-spouse/civil partner?
Yes. State pensions, pensions inherited on death, including beneficiary drawdown, or any pensions which already have an earmarking order because of a divorce.
How is a pension sharing order received before 6 April 2006 treated?
Anyone who had received a pension sharing order before 6 April 2006 was able to apply for an increase in the lifetime allowance to offset any 'pension credit' entitlement. This enhancement factor is known as “the pre-commencement pension credit factor”. The individual had to notify HMRC by 5 April 2009.
And while the lifetime allowance has been abolished from 6 April 2024, the credit factor enhances an individual’s lump sum and lump sum death benefit allowances.
Any 'pension debit' from a pension sharing order received before 6 April 2006 can be ignored.
How is a pension sharing order received after 6 April 2006 treated?
For pension sharing orders received since 6 April 2006 there are still 'debits' and 'credits'.
It is possible to qualify for a pension credit factor that will enhance an individual’s lump sum and lump sum death benefit allowances. To qualify for a pension credit factor the following conditions must be met:
- the pension credit is held in a registered pension scheme and was acquired on or after 6 April 2006, and
- it’s derived from a pension benefit from the same or another registered pension scheme that was already in payment to the original member at the time of the pension sharing order, and
- the original member became entitled to that pension in payment on or after 6 April 2006.
No entitlement to a pension credit factor arises if an individual acquires pension credit rights on or after 6 April 2006 but those rights were derived from:
- the pension of their ex-husband, ex-wife or former civil partner (the original member) that was in payment at the time of the pension sharing order, but which came into payment before 6 April 2006, or
- rights held by that ex-husband, ex-wife or former civil partner (the original member) that had not been crystallised at the time of the pension sharing order.
The deadline to apply for pension credit enhancements from previously crystallised rights is 5 April 2025.
The deadline is 31 January following the end of the tax year, 5 years after the end of the tax year in which they legally became entitled to the pension credit.
If 5 April 2025 is before this date, the deadline is 5 April 2025.
The date of the pension sharing order cannot be any later than 5 April 2024, as the lifetime allowance will be abolished from 6 April 2024.
Janet and Tony are getting divorced. Janet receives a pension from her company pension scheme and it is to be split as part of the divorce settlement. Can pensions in payment be split in this way and if so, how is it done?
A Pension Sharing Order can apply to pensions in payment. The capital value of Janet's pension will be shared in the agreed proportions. Her share will then be applied to provide a reduced pension for her, using her current age. Tony's share will be transferred as uncrystallised benefits to his pension scheme but with no tax-free lump sum entitlement (as this has already been paid when Janet first took her benefits). This is called a 'disqualifying pension credit'.
Jenny and Peter are getting divorced. As part of the settlement, her pension rights in a Public Sector Scheme have been made subject to a pension sharing order. Peter thought he'd be able to transfer his resulting pension credit to his own personal pension plan but he's been told that it has to be kept in the Public Sector Scheme. Can he insist on a transfer?
No. Pension schemes can deal with pension sharing orders by offering an external transfer, internal transfer or a choice between the two. An internal transfer is where the ex-spouse joins the scheme as a deferred member. Private sector pension schemes are almost certain to offer an external transfer although they could offer an internal transfer as an alternative. However unfunded public sector schemes can only offer an internal transfer.
Chantelle and Troy are getting divorced in England. It's an amicable split and both agree Chantelle should get a 50% share of Troy's personal pension. Since they're both agreed about what should happen, Troy is quite happy to just transfer 50% of the pension plan's value to Chantelle's pension plan rather than going to the expense of going to court. Can he do this?
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.