Pensions sharing on divorce

For many their pension is one of the most valuable assets they have. The value of any pension assets must be taken into account in any divorce settlement or on the dissolution of any civil partnership.
Key points
  • Pension sharing orders provide a 'clean break' solution
  • There are slightly different rules for pension sharing orders in Scotland than there is in England and Wales
  • There are two ways in which a spouse can receive a pension share: - become a member of their ex-spouse's/civil partner's scheme in their own right, or - transfer to another pension arrangement in their own name
  • The former spouse/civil partner will be entitled to a pension credit equal to the value of the pension debit against the member's pension rights.

General

Pension sharing could apply to any divorce where proceedings commenced on or after 1 December 2000.

Pension sharing isn't compulsory. Like offsetting it offers a clean break solution. It's generally the preferred option for clients who have insufficient assets to offset their pension, or have other assets they want to keep. The main difference between earmarking and sharing is that there is a legal transfer of ownership under pension sharing.

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 taken into account.

After the sharing order comes into effect, the receiving spouse/civil partner owns the pension in their own right and can manage it as they wish. The ex-spouse's/civil partner's 'share' of the pension is called a pension credit. The reduction in the member's pension as a result of the pension share is called a pension debit.

So how does it actually work?

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 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.

There are two ways in which a spouse/civil partner can receive a pension share. They can:

  • become a member of their ex-spouse's/civil partner's scheme in their own right, or
  • be given a transfer to a pension plan in their own name.

The option offered will depend on the type of pension scheme the member is in. In practice, it is likely that most funded arrangements will prefer to offer a transfer rather than offering membership. Private pension schemes must offer the option of a transfer.

Unfunded schemes, like some of those in the public sector, are more likely to offer scheme membership only. For some of these schemes this is the only option they offer.

Some schemes may choose to offer both. The approach taken must apply to the scheme as a whole. A different approach for specific members or circumstances in not allowed.

Where a transfer is to be made, the ex-spouse/civil partner must advise the trustees of a suitable pension plan to receive their pension credit. If this is not done, the trustees can select a default arrangement to transfer the pension credit into. This can be done without the ex-spouse's/civil partner's consent.

What pension scheme assets can be shared?

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

Pension schemeCan 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

Some common questions

Yes, tax-free cash can be taken from a pension credit. Tax-free cash isn't available if the benefits that the pension credit came from were already in payment. This is called a disqualifying pension credit as it doesn't qualify for tax-free cash.

Pension credit benefits can be taken as provided for under the rules of the scheme that they are part of or transferred to. There are no restrictions. But, see answer above for disqualifying pension credits.

Pension sharing orders effective on or after 6 April 2006 count towards the ex-spouse's/civil partner's lifetime allowance only. If the order affected pension benefits that were already in payment, the ex-spouse/civil partner can apply for an increase to their own lifetime allowance. They can do this as the pension benefits will have been tested against the lifetime allowance of the member when the benefits were taken.

Notes

PTM029000: General principles: Divorce and pension benefits

Note

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.

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Last updated: 29 Mar 2019

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.