There are several different ways that pension assets can be split, and one of the most common ways is through a pension sharing order. But what is pension sharing? How does it work? How is a pension valued? And what about the lump sum? Keep reading for answers to these questions and more in your guide to pension sharing orders.
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What is pension sharing?
Pension sharing orders are a common way that pension benefits can be equitably split when your marriage ends.
An order divides some of your existing pension rights and benefits in two, so each spouse maintains their own separate retirement provision. A court will order that a specific percentage of the pension is shared, either in the existing pension scheme (an internal transfer) or to a new pension scheme (an external transfer).
A pension sharing order applies the percentage split of the pension as decided by the court to the Cash Equivalent Transfer Value (CETV) of the member’s pension scheme on a specific date.
What types of pension can be shared?
Pension sharing orders can apply to a wide range of private, occupational and personal pensions, as well as pensions that are already being paid. The following types of pension can be shared:
- Occupational pension schemes, including additional voluntary contributions
- Stakeholder pensions
- Personal pensions
- Retirement annuity contracts
- Free-standing additional voluntary contributions (AVCs)
- The State Second Pension
- Contracted-out SERPS.
Your basic State Pension can’t be shared if you divorce, but if you have an additional State Pension then the court can include this in a pension sharing order when your marriage ends. If you receive a pension as a spouse or dependent then this also cannot be shared.
Do I need a court order for pension sharing?
Yes. Pension sharing can only take place through a court order in England and Wales. The rules are slightly different in Scotland and you can share a pension either through a court order or through an agreement via your respective solicitors.
Even if you amicably agree the division of your pension, you’ll need to get a consent order from the court for the pension sharing to take place. Pension providers cannot transfer or split a pension without such a court order.
How do I get a pension sharing order?
The first stage of obtaining a pension sharing order is to get a valuation of your pension benefits (see below).
The pension scheme member will have to ask for this. The valuation must be provided within three months, and the information request must note that the valuation is required for a divorce settlement in order that the administrators of the scheme know that this deadline applies.
When a court issues a pension sharing order, it will stipulate in percentage terms the amount that is to be transferred to the other spouse (for example 33%). This is called a ‘pension credit’ (see more about pension credits below). Your pension will be reduced by the same amount (known as a ‘pension debit’).
The person receiving the pension credit normally has two choices. They can join the existing scheme, or they can transfer the value to another pension scheme
A Form P1 then has to be completed and attached to the pension sharing order. This contains the information needed to apply the order, and will include:
- the names and dates of birth of both spouses
- your National Insurance numbers
- the pension plan policy number
- the address of the pension provider
- the name of the administrator of the pension scheme.
Pension providers are permitted to pass on the cost of administering a pension sharing order. Form P1 outlines these costs, and should state which party is responsible for paying these costs. If you don’t agree who will pay, the charges are paid by the pension owner (the person sharing the pension).
Once the provider of the pension to be shared has received all the paperwork, there is a time limit of four months from your divorce ‘decree absolute’ in which to implement the pension sharing order.
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How is a pension sharing order calculated? How are pension assets valued?
The court will instruct the pension scheme member to obtain a valuation of the pension (see above). This is normally done through a Cash Equivalent Transfer Value (CETV) and the pension administrator can provide this.
This valuation is used by the court to decide how to divide the pension. They will calculate what percentage of the pension our spouse is entitled to, and the total value is calculated the day before the pension sharing order comes into effect.
While the CETV is most commonly used, in certain circumstances, you can argue for a different value to be used.
In Scotland, only the value of the pension which has been accrued during your marriage up to the date of separation should be taken into account.
What about a protected lump-sum? How is that dealt with during pension sharing?
If your ex-spouse receives a pension credit through a pension sharing order, they will not benefit from any protected tax-free lump sum or stand-alone lump sum that is applied to the scheme member’s funds.
This means that your ex-spouse would receive a maximum of 25% as a tax-free lump sum from a pension credit that originated from uncrystallised funds.
Note that if the value of the pension fund after the pension debit falls below the amount of the protected lump sum, it would typically not be possible to take all of the fund as a lump sum. Part of the fund may have to be set aside to provide a pension income, with the balance being available for you to take as a lump sum.
Does pension sharing apply to a pension that is already being paid?
Yes. You can obtain a pension sharing order to divide pensions that are being paid, including those that are being paid by final salary occupational schemes.
Benefits can be paid immediately, depending on the age of the spouse receiving the ‘pension credit’. Note that the payment of benefits from the pension credit is not linked to the age of the pension scheme member.
For example, the person receiving the credit may have already retired, but if the other spouse has not reached normal pension age (57 for most people) then they can’t start receiving any payment until they reach this age, or they have met the ill-health condition.
If an annuity is to be shared with your ex-spouse, the original annuity will have to be ‘unbought’ and you will need to obtain a current value for it. Bear in mind that some scheme administrators will then assess the current health of the owner as this may have changed since the annuity was calculated.
What can I do with my ‘pension credit’?
When a pension sharing order is implemented, the part of the pension awarded to your ex-spouse is called a ‘pension credit’ (see above).
If you receive a pension credit you can do one of three things.
Transfer it to a pension scheme of your choice
All private sector occupational and personal pension schemes must offer this option. You can transfer your share into a pension scheme you are already a member of (provided the scheme is able to accept a transfer) or into a new pension arrangement.
Become a member of the existing pension scheme in your own right, at the discretion of the scheme trustees
Unfunded public sector schemes or final salary schemes which are not fully funded have to offer this option. Under this option, you will receive the increases that the scheme gives to deferred pensions. In addition, pension schemes that have assets which are not easily liquidised may also decide that your ex-spouse should become a member of the existing scheme in their own name. Examples of situations where this might occur include public sector schemes or where assets are in property such as Self-Invested Personal Pensions (SIPPs)
Transfer it to a buy-out policy
This is sometimes known as a ‘Section 32’.
What forms do I need for pension sharing?
A pension sharing order has to be issued by the court. It must be accompanied by the Form P1 for every pension that is going to be shared.
See details of the information that must be included on a Form P1 above.
In Scotland, you can also share a pension through a ‘qualifying agreement’. This is a financial agreement written by your solicitors and signed by you both.
This agreement should include the provider name and reference number of the pension arrangement that the share is to be taken from. It should also include the percentage or amount to be shared.
Can a pension sharing order be made if we divorce overseas?
A pension sharing order can only be issued by a court in the UK. This means that a foreign court does not have the power to make a pension sharing order on a UK pension.
You would need to obtain a pension sharing order from the UK court under Part III of the Matrimonial and Family Proceedings Act 1984 (or the equivalent Scottish legislation). This will follow the usual process, and the court order will include the UK pension policy number and the relevant percentage (or amount in Scotland) that is to be shared.
If your ex-spouse is living abroad when you divorce, and they do not have a UK pension, it may be difficult for them to set up a UK-based pension plan in order to accept the transfer from your pension. They may have to transfer their pension credit to a qualifying recognised overseas pension scheme (QROPS).
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