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After the matrimonial home, a pension is usually the next biggest asset. It can be split in several ways, so it is worth taking a little time to understand the process and options before deciding what to do. Here we discuss how a final salary pension can be shared (also known as a ‘defined benefit’ pension), how it is valued, and how different life stages may affect your choices.
What is the sharing process for a final salary pension?
- The pension holder obtains a valuation of their pension benefits cash equivalent transfer value (CETV) together with certain other information. The CETV must not be over 12 months old.
- Once requested, the pension provider, or trustees, must provide the valuation within 3 months (or no later than 6 weeks prior to a court hearing if they have had notice of an impending hearing). If a request has only been made for a valuation and not a CETV, then the pension provider has one month to comply. It is important to stipulate within the request that it is required as part of a divorce process, so the provider is aware deadlines apply.
- Either an agreement will be reached between the parties as to how, or even if the pension should be shared, or, if the couple are unable to agree, the court may ultimately have to intervene to decide how the pension will be allocated.
- Only a court can make a pension sharing or pensions attachment order (sometimes known as an ‘earmarking order’) – this can still be done by agreement without attending court via what is known as a Consent Order.
- In the event of a pension sharing order being in place, the existing scheme can either choose to allow the ex-partner to join the scheme in their own right, or to take the transfer value to another pension scheme. Typically, most schemes only allow a transfer out to another pension, and where the ex-partner cannot or will not decide on where to transfer their share, the existing scheme can choose a default option.
- There may be a cost to implement the pension sharing order from the pension provider, which they may pass on to the pension holder. There are no limits set on the charges, but if they become applicable, the scheme must inform the parties of the charges before the order is made.
Do I have to split my final salary pension?
Here is a list of options for splitting a final salary pension, with a summary of how each option might be structured.
How it works:
|Individual agreement between the couple||It is not mandatory to share pensions on divorce. A couple can reach an informal agreement, but it is important to have it legally documented, particularly if decades are likely to pass before the pension becomes payable.|
|Pensions Offsetting||The value of the pension is offset against other assets, such as the former family home. For example, you could get a larger share of the home in exchange for either reducing your claim on the other party’s pension or foregoing it completely.|
|Pension sharing order||The pension, or pensions if your ex has more than one, is shared on a percentage basis. You can either join your ex’s pension scheme or the agreed sum can be transferred into a pension in your own name. If you do not have your own pension, you will need to set one up.|
|Deferred lump sum||You receive a lump sum from your ex’s pension when they retire – depending on their age, you could wait for some time. This solution is more likely to benefit someone with an ex who is nearing retirement age.|
|Deferred pension sharing||This is used if your ex has already retired and is receiving their pension, but you have not yet retired and are still too young to have received your own pension. This can be more complex to arrange than other forms of pension sharing, so legal costs can be greater.|
|Pensions attachment order
(also called “earmarking”)
|You receive some of your ex’s pension when it is paid to them at the start of their retirement. This can be paid as pension income, a lump sum, or both, but you cannot start receiving pension payments before your ex has taken their pension. It can be problematic if you are older than your ex and are relying on their pension payments for your own income.|
How might the final salary pension be valued?
The method of valuation used by all pension providers is the Cash Equivalent Transfer Value (CETV), which provides a “snapshot” value of the pension at the time of the request. A CETV is classed as the accumulated contributions made by the member (or on their behalf, such as from an employer) together with investment returns.
The problem is that the CETV can be inaccurate and the way calculations are made vary between providers according to their own rules. This can be important in the context of a divorce, where relying only on CETVs may produce unfair outcomes.
In the case of a final salary pension, although a CETV should be requested, it may not provide a particularly accurate valuation, in these cases it may be wise to obtain advice from a pensions specialist or financial advisor.
How is the Cash Equivalent Transfer Value (CETV) used?
The CETV is the amount that the current pension provider needs to transfer to another pension provider if a transfer were requested as part of a pension sharing order. It gives parties to a divorce the information they need to see whether the pension pot is a sufficient asset, and if so, may be used when discussing (negotiating) the division of other matrimonial assets. Pension sharing is not compulsory, but it offers a clean break solution.
Can a final salary pension be shared that is already being paid?
If either spouse has retired and the pension is in payment, it is still possible to split the pension, but there are slightly differing rules and they are more complex. In particular, it is not possible for one party to take a lump sum from their ex’s pension if it is already being paid, even if they have already done so themselves.
Will sharing a final salary pension affect my retirement age?
In short, no, however, there is a ‘but’. If a large chunk of your main, or only, pension has been shared with your ex, then it stands to reason the amount left will be significantly smaller. If you are a long way from retirement age, you will probably have enough working life to increase your contributions and build the pot back up, finances allowing. On the other hand, if you are older when the pension sharing takes place and you do not have the working years left before retirement to recoup the lost sum, you may take the view to delay your retirement and work longer; it should be noted this is personal choice. This will give you more time to make further contributions or truncate the length of time your pension payments are being paid.
Impact of divorce on a pension income
With divorce becoming more commonplace in later life, it is essential you factor in how pension income can be affected. Just one in three divorcees estimate they have saved enough to give them a comfortable retirement. Divorced retirees typically expect to receive an average annual retirement income of around £13,800, approximately 16% less than those who have not divorced, who expect £16,400.
For couples who divorce at the age of 60, common sense dictates there is little time left to boost a plundered pension pot before retirement. However, it is not all bad news. For those aged between 40 and 44 (the most common age for divorce), they still have some way to go before receiving their gold watch and can use the time to boost contributions.
How does the court enforce a pension to be shared?
Once a pension provider receives all the documents, they have four months from either the date of the Decree Absolute, or seven days from the expiry of the time limit for appealing any financial order (whichever is the later) to implement the pension sharing order.
If the court sent the documentation to the provider and implementation remains outstanding, then the pension provider should be contacted to find out why it did not implement the order within the time stipulated. If they do not reply, then once their complaints procedure has been exhausted, you can complain to the Pensions Ombudsman, who have the power to award compensation if someone loses out financially because of implementation delays or failures.
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