Pensions & Divorce

In marriage or a civil partnership pension schemes are treated as marital assets.

Where divorce occurs, there are three different options available to each party:

  • Clean break or offsetting – i.e. one party keeps the house, the other keeps the pension
  • Pension Earmarking Order – part of a pension is ring-fenced for the other party
  • Pension Sharing Order – part of a pension is transferred into the sole name of the other party

Obviously unless couples are asset rich, then option 1 is not feasible. Option 2, Earmarking, is generally not pursued either as any such order will cease on death of the individual who ‘holds’ the plan and the pension will also cease if the other spouse remarries.

Pension Sharing is therefore commonly used for fairly dividing these assets as the plans will be moved into separate names and kept completely free of any possible connection.

How sharing works:   

Spouses A and B were a married couple who subsequently divorced.  Spouse A is a member of an occupational pension scheme or a personal pension scheme. Under pension sharing there will be a reduction in spouse A’s pension rights. This reduction is known as the ‘pension debit’.  There will be a corresponding allocation of rights to spouse B.  This is known as the ‘pension credit’.

On the basis of the sharing order, a scheme will divide pension rights in the same specified proportion for each element within the scheme.  If the member has more than one scheme, the court will be able to order a 50:50 split for one, a 60:40 split for another and so on (including a 100:0 split in one).

Some occupational schemes may also offer to put the spouse into the scheme, with rights in their own name, as though that individual had been employed there.

Once the funds have been transferred into an individual pension, then benefits can usually be accessed from age 55 and all of the usual retirement options will remain open to them; such as:

  • The purchase of an annuity to provide income for life
  • Flexi-access Drawdown
  • Phased Retirement

If Tax Free Cash had not yet been accessed prior to the divorce, then 25% of the pension will be able to be paid.

Scheme trustees can levy an admin fee for enacting a sharing order. Any such costs are split 50/50 between the two parties.

Consideration of Pension Sharing:

  • All non-state schemes (including any Guaranteed Minimum Pensions) will be liable to sharing orders – as well as State Earnings Related Pension Scheme and Stated 2nd Pension – but not the State Pension, although it will figure in the overall financial assessment before the court.
  • All forms of pension will be liable whether deferred or in payment.
  • Sharing legislation respects legal differences in, for example, Scotland, which unlike the rest of the UK concentrates on assets acquired during but not before marriage.
  • The valuation of pension rights uses the Cash Equivalent Transfer Value (CETV) for sharing purposes.

Compensation under the Pension Protection Fund also be shared.

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