Pension Sharing Orders
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Lauren Gaines
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Pension Sharing in Divorce
With so many things to consider when dividing up your finances during a divorce or dissolution of a civil partnership,, it can be easy to focus only on the immediate problems, like where you are going to live, and it is easy to forget about the pensions that either of you hold.
Many people also believe that a pension is not something that is considered available for sharing with another person, however this is not the view of the court when it comes to separating assets fairly upon a divorce.
Pensions can often be the most valuable assets in a marriage / civil partnership. It is vitally important to understand how you can split your pensions fairly; otherwise, you may lose on retirement income and financial stability. If you don’t consider pensions properly there is a real risk you will not achieve a fair outcome – whether you decide to make a claim for a share of your ex’s pension or not.
As leading divorce lawyers, our team at Osbornes Law can help you to ensure that they are properly taken into account during financial negotiations.
While there are several options for dividing pensions during a divorce / dissolution, the most common arrangement is through a Pension Sharing Order.
What is a Pension Sharing Order?
A Pension Sharing Order forms part of the overall financial settlement on divorce. When a Pension Sharing Order is made, a percentage (anything up to 100%) of one person’s pension is transferred into a separate pension pot for the other person.
What pensions can be included in a Pension Sharing Order?
Most types of pensions can be included in a Pension Sharing Order, including workplace or occupational pensions, money purchase schemes and self-invested pension plans (SIPPs).
If the pension is held overseas, the majority of the time the court here is unable to make an order against them, however there are still ways to ensure that the value of this pension is taken into account in an overall settlement (see below).
The basic state pension cannot be shared if your marriage or civil partnership ends. However, the court can look at the incomes you will receive from your state pensions when determining your future income needs.
How do I know the value of my pensions?
The value of your pension can be obtained by sending ‘Form P’ on the court service website to the pension provider, requesting the pension’s Cash Equivalent Transfer Value (CETV). Some schemes will have their own online request form for information in respect of sharing that specific pension on divorce/dissolution.
The CETV is the amount that would be paid if you were to transfer your pension to another scheme.
You and your ex will need to include an up-to-date valuation for every pension that you have on financial disclosure Form E. This will help you both and your legal representatives calculate the overall value of all the pensions within the marriage.
CETV is only an approximation of the value of the pension in question and it may not take into account all the pension benefits. There are several situations therefore when the cash equivalent valuations do not give a realistic value of your (or your ex’s) pension. In these scenarios we can explore with you whether a pension on divorce expert is required to calculate a true valuation of the pension so you can be confident that the financial settlement is fair.
What happens to the pension funds following a Pension Sharing Order?
The main advantage of a Pension Sharing Order is that both of you can retain your own pension pot. The pension credit will be transferred into:
- A separate pension scheme, commonly used in private sector pension schemes (external transfer); or
- A separate pot with the same pension provider, commonly used in public sector pension schemes (internal transfer).
Some schemes such as the NHS only allow internal transfers, while others only allow external transfers.
It is a good idea to get independent financial advice to help you decide on the best transfer option for your specific situation.
What are the benefits of a Pension Sharing Order?
- You will each have your own separate pension pot.
- It provides the security of retirement funds for both of you.
- The pension arrangements will not be affected by any future changes in circumstances, such as you remarrying or the death of your ex.
- You can make your own decisions about when to retire which are not dependent on your ex’s retirement plans.
- You have the freedom (in the case of an external transfer) to choose your own pension scheme and investment options, rather than being limited by your ex’s choices.
What are the disadvantages to a Pension Sharing Order?
- The process can be lengthy and there may be additional costs involved, such as actuarial fees and the fees of a wealth planner to work out what income you will need in retirement to maintain your lifestyle, and what the implications of a Pension Sharing Order will be.
- Some types of pensions, such as Small Self-Administered Schemes, may be more complicated to divide through a Pension Sharing Order.
- Pension sharing as part of a divorce settlement can affect available allowances – you may need to take bespoke tax advice on the implications.
Can I share a pension that is held overseas?
It may be possible to include an overseas pension in a Pension Sharing Order. However, it depends on whether there are any rules regarding pension division in the country in which the pension is held. Some countries have a ‘standard division’ where each party’s entitlement to the pension is laid out by law. Other countries may prohibit pension sharing altogether.
Even if the foreign pension cannot be included in a Pension Sharing Order, it still needs to be professionally valued and taken into account in the overall financial settlement.
The international divorce team at Osbornes Law can provide expert advice on the division of overseas pensions. Pension offsetting, where one party receives a larger share of the other assets in lieu of pension sharing, may be a viable alternative.
How do I obtain a Pension Sharing Order?
The first step is to obtain a pension valuation. Then, you can look at how sharing the pension assets can be achieved in the overall financial settlement.
If you and your ex can reach an agreement on the division of your assets, a pension sharing order can be included in a Consent Order which is then approved by the court.
If no agreement can be reached, the court will make a decision based on all relevant factors, including both of your needs and the assets available for sharing.
A Pension Sharing Order can only be made if the Final Order has been issued. This is the legal document that finalises the divorce or dissolves the civil partnership. It is strongly recommended that you delay obtaining the Final Order until all the financial matters, including how pensions will be split, have been agreed upon.
Is pension sharing right for me?
Whether a Pension Sharing Order is the right option for you will depend on your individual circumstances. Generally though, it is worth exploring the option of a Pension Sharing Order where:
- Your financial resources do not meet your needs.
- One of you has a significantly larger pension than the other.
- You are nearing retirement and lack the opportunity to build your own pension savings.
- You want to access pension benefits sooner instead of waiting for your ex-spouse to retire.
Can I take a lump sum with a Pension Sharing Order?
You cannot take a lump sum directly from the pension with a pension sharing order. Instead, the pension credit you receive will be transferred into your own pension pot, which you can manage separately. Once the funds are in your own pension, the rules of that specific pension scheme will determine when and how you can access the money, including whether a lump sum is available when you reach the age at which you can draw from your pension.
If you’re looking to receive a lump sum earlier in the divorce settlement, you may want to consider pension offsetting, see below.
What are the alternatives to pension sharing?
Where a Pension Sharing Order is not suitable or does not appeal to you, the following options can be used to achieve a fair division of pension assets:
- Pension offsetting
Pension offsetting means that you would both keep your own pension funds, but the party with the lower pension value receives a greater share of another asset, such as the family home, or a lump sum of money instead. This can be an attractive option if the pension is small and it is not cost-effective to make a Pension Sharing Order, or if the pension is held overseas.
It is vital that a Pension On Divorce Expert is instructed to provide this calculation, for this to be a fair and successful option. Pension CETV is not a pound-for-pound equivalent to the value of the home, for example, so this is not a calculation you should attempt yourself as it is likely to be incorrect and therefore produce an unfair result.
- Pension attachment orders (earmarking)
A Pension Attachment Order will set aside or ‘earmark’ an amount of one person’s pension pot for their ex in the future, so that when the pension starts being paid out, their ex also gets a share of this.
The drawback is the recipient cannot get the payments until their ex-spouse starts taking their pension benefits. If their ex-partner dies early, they will lose this source of income.
Because of the risks involved in both of these options, your solicitor likely will recommend that you explore pension sharing as the first option.
Speak to an expert
Seeking specialist advice at an early stage in the process is highly recommended to ensure that the best possible outcome is achieved. If you would like to have a confidential discussion about divorce or separation with an expert divorce lawyer, contact us by:
- Filling in our online enquiry form; or
- Calling us on 020 7485 8811
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