Pensions & divorce - frequently asked questions
Your questions answered.
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.
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'. A 'pension credit' counts towards the lifetime allowance of the ex-spouse. A 'pension debit' doesn't count when testing benefits against the lifetime allowance but it reduces the value of the pension rights to be tested against the lifetime allowance. The rules give everyone their own lifetime allowance and it is only the benefits that they actually receive that will be tested against it.
It is possible to qualify for a pension credit factor that will enhance the ex-spouse or former civil partner's lifetime allowance. 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.
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 to an uncrystallised 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 the Local Government Pension Scheme (LGPS) 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 LGPS. Can he insist on a transfer?
No he can't. Pension schemes can deal with Pension Sharing Orders by offering external transfers, internal transfers or a choice between the two. Internal transfers are where the ex-spouse joins the scheme as a deferred member. Private sector pension schemes are almost certain to offer external transfers although they could offer an internal transfers as an alternative. However unfunded public sector schemes can only offer internal transfers.
Chantelle and Troy are divorcing. 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.