Pensions sharing order

What is a pension sharing order?

A pension sharing order is a legal way to divide pension benefits when a marriage or civil partnership ends. It lets a court decide how much of one person’s pension should go to their ex-spouse or ex-civil partner, so both people get a fair share and can move on with separate finances. 

This process is available for divorces or dissolutions that started on or after 1 December 2000. Usually, the court sets the share as a percentage of the pension’s value, but in Scotland, it can be a fixed cash amount. In England and Wales, pension sharing is implemented through a court order. In Scotland, it can be agreed by a court order or by an agreement between solicitors. Unlike other methods, pension sharing means the ex‑spouse or ex‑civil partner becomes the legal owner of their share. 

One of the main benefits is that each person gets control over their own pension after the split. This is helpful when there aren’t enough other assets to balance out the pension, or when someone wants to keep other assets. The ex‑spouse or ex‑civil partner can keep their pension share in the same scheme or transfer it to another approved pension plan, often with help from a financial adviser.

It’s important to know that the rules are different in England, Wales, and Scotland. In England and Wales, all pension assets are considered. In Scotland, only the pension built up during the relationship is included. Also, the final value of the pension share can change if the market goes up or down before the order is finished, because the share is based on the pension’s current value. 

Let's look at pension sharing orders in more detail.

What pension scheme assets can be shared?

In England & Wales all pension assets belonging to the couple are taken into account on divorce.

In Scotland, only pension assets built up during the period of marriage/civil partnership are considered.

Pension sharing doesn't apply to all pension schemes. The table below gives details of what pension scheme assets can and cannot be shared:

What happens after the pension sharing order takes effect?

In England and Wales pension sharing can only take place by court order. In Scotland pension sharing can be activated by court order or settlements can be reached by negotiations between the opposing solicitors; this will be contained in a 'qualifying agreement' rather than a court order.

The receiving spouse/civil partner of the individual owns the pension in their own right and can manage it as they wish. The individual's ex-spouse's/civil partner's 'share' of the pension is called a pension credit. The reduction in the individual's pension because of the pension share is called a pension debit.

The amount of pension to be transferred should be expressed as a percentage of the cash equivalent transfer value (CETV) and not as a specific lump sum (except in Scotland). This causes some practical problems, as the CETV can change quite significantly during the time that the divorce is being finalised, particularly if the stock market is going through a volatile period. The actual amount of the pension credit will not be known until the court order is finalised.

How does a pension sharing order work?

The trustees of the individual's pension arrangement are responsible for implementing a pension sharing order, although in practice this duty will usually fall to the scheme administrator.

In order to implement a pension sharing order, the administrator may require information from the trustees of the pension arrangement, the individual and the individual's ex-spouse/civil partner as well as the court.

Following implementation of the order the individual's ex-spouse/civil partner will receive a pension credit which may be held within the existing pension arrangement or transferred to another pension arrangement. The individual's pension receives a corresponding pension debit.

What is the pension sharing process? 

Both parties to the divorce must get valuations of their pension benefits. These are then used to agree whether a split is needed and if so, what that split will be. This information is needed before the divorce hearing. It is important the scheme/provider is made aware the information is needed for a divorce.

It’s worth noting and making your client aware that as the split is a percentage of the value of the plan, the amount is not guaranteed. This is because the unit price of the funds will change between the original valuation to agree the split and when the benefits are actually shared after the divorce is finalised. This is not a mistake. The rules in Scotland are different as it is monetary amount that is agreed and not a percentage.

The pension sharing order may be implemented on any day, chosen by the trustees, within what’s known as the implementation period. The implementation period runs for 4 months from the date of the pension sharing order or the date the trustees have all the information they need if later. The scheme administrator chooses the valuation date within the implementation period on which to calculate the actual share of the pension rights. The benefits must then be transferred before the end of the implementation period.

Can the pension sharing implementation period be extended?

In certain circumstances the trustees of an occupational pension scheme can ask that the implementation period be extended beyond 4 months, to allow them to deal with issues which affect the scheme as a whole.

The main examples of this are where a defined benefit scheme is winding up or where assets under a self-invested arrangement must be sold and the trustees believe that market conditions are unsuitable to do this.

The reason for this is to ensure that none of the other scheme members are unfairly affected by the implementation of a pension share for one of their colleagues.

Can State pensions be shared on divorce?

If the individual reached State Pension age before 6 April 2016 their Additional State Pension could be shared. This is the amount paid on top of any Basic State Pension and Graduated Retirement Benefit and was based on their earnings. 

If they get to State Pension age on or after 6 April 2016 and their divorce or dissolution proceedings started on or after 6 April 2016, then their protected payment can be shared. Their protected payment is the amount paid on top of the standard weekly rate of the new State Pension. 

If the starting amount is more than the full new State Pension, the part of the starting amount that is above the full new State Pension is called the 'protected payment'. 

To apply for a valuation of state pension DWP form BR2ONSP should be completed.

What can someone do with a pension credit?

Scheme membership

Trustees of unfunded arrangements are likely to offer scheme membership to their members' ex-spouse/civil partner. The ex-spouse/civil partner must be given fair value for the pension credit, but they do not have to be given the same benefit structure as other scheme members.

External transfer

Trustees of funded occupational pension schemes are more likely to offer an external transfer. This may be paid to any approved pension arrangement, including a personal or stakeholder pension or another employer's scheme.

Any advice about the most suitable receiving vehicle must of course be given by a qualified financial adviser.

What is a disqualifying pension credit?

If the transferring plan is from a pension in payment, annuity or scheme pension, it will be unwound and recalculated with the pension credit being split out as a cash equivalent value. This credit will be treated as uncrystallised and can be paid to another registered pension scheme. There is no requirement to buy an annuity.

If it is in drawdown, the split will just be applied to the drawdown fund.

The pension credit above is called a disqualifying pension credit because it will not be possible to pay out tax-free cash when the ex-spouse/civil partner chooses to retire since it has already been paid to the individual.