1 August 2022
Pension Sharing Order In 2022Pensions and divorce are both tricky, complicated subjects. The end of a relationship is not a convenient time for technical discussions of your pension, and divorce proceedings make everything more complicated. Deciding on the fate of simple assets is hard in a divorce, and pension plans are much more complex than the family home. But dividing up pensions in divorce doesn’t have to be a headache. A pension sharing order can give you a clean break between you and your ex’s finances. This article will demystify the process by outlining the rules and cutting through the court-room jargon.
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What is a pension sharing order?
A pension sharing order is a court order used to separate two people’s pension assets. They are primarily used in the context of divorce, but also when a civil partnership is dissolved.
Pension sharing is important, as retirement savings are often at least as valuable as other marital assets such as a house or maisonette.. Plus a lot of people depend on their spouse to support them throughout their life.
So without a pension sharing settlement, these people would be left almost entirely without retirement benefits. Pension share legislation was introduced in December 2000 to ensure provision to people in these circumstances.
A pension sharing order may sound severe. But though it is technically a court order, it is a necessary part of even many amicable divorces. This is because unlike with some assets such as the family home, you and your spouse cannot simply make an agreement between the two of you. Pension schemes require a court order to make the necessary changes.
Here is a video about a pension sharing order.
When and how are pension sharing orders issued?
Only a court can issue pension sharing orders. You should discuss pension sharing with your divorce solicitor, as they may have to initiate the process. Less mature couples tend to have more limited pensions set aside. In the majority of such cases a pension sharing order is often not necessary.
In fact, the court might forego the process entirely. Discuss this possibility with your solicitor if you have any burning questions.
How does the process work?
It’s good to have a guide to the different steps before we look at them in detail.
Assuming you have begun formal divorce proceedings, first the pension sharing order is issued by the court. Then you and your ex-spouse must submit documents regarding any existing pension arrangement either of you may have.
When you have provided enough information, the court then instructs your pension providers to begin implementation.
At this stage, if the transferee’s pension scheme allows transfers, funds from their partner’s pension will be moved into their plan. Otherwise, a new pension is created in the name of the transferee.
How long does everything take from start to finish?
This depends on the nature of your civil partnership dissolution or divorce, and pensions can vary in how complex they are. If your divorce procedure is amicable, you both promptly submit documentation, and your pension providers are similarly punctual, everything could be finished within a handful of weeks.
But there are a number of things that can go wrong and become obstructions. If there is a problem in valuing a defined benefit pension or a dispute with a pension provider, the consequences can be messy.
So it could be as long as a few months before the pension sharing order has been fully carried out. If one of you has to create a new pension at the conclusion of the process, this can cause significant delays, so bear this in mind.
How are pensions valued?
After a pension sharing order has come into effect, the courts will prepare a valuation of your pension assets, as well as your partner’s. This is then used to ascertain the value of resources to be transferred from one person to the other.
This process of valuations will take into account all your private pension arrangements. This includes every workplace pension scheme you are a part of. If you still have a small pension pot with a previous employer, this must be disclosed. Many are still members of such schemes without even being aware of it, but it is your responsibility to find out.
Valuing defined contribution pensions is simple, as it is usually simply a pot of money or bundle of assets, such as stocks and bonds. Valuing a defined benefit pension, such as a final salary scheme, is a more complex process. This is because it represents entitlements rather than existing assets. A Cash Equivalent Value must be calculated for these pensions, and this may come with a fee.
This process will also apply to any personal pensions you have accrued. So if you have a Self-Invested Personal Pension for example, this may be split between you and your ex. (Any asset or investment in your plan will be valued on the basis of its market price.) The same applies to stakeholder pensions.
Even some annuities can be subject to a pension sharing order. This does not include Purchased Life Annuities. Nor does it include annuities one possesses as another’s dependent or successor. In such cases, a deceased relative or former partner paid for death benefits, which are now held by one of the parties to the divorce.
State pensions are also subject to a pension sharing order. All retirees have a certain state pension entitlement. This is the basic State Pension, and it is not factored in. But those over a certain age receive an extra payment called the additional State Pension. This is not exempt from pension sharing.
Finally, the courts use all this information to calculate the Cash-Equivalent Transfer Value of both parties’ pensions.
What is a CETV?
A Cash-Equivalent Transfer Value, or CETV, is a way of comparing your assets to those of your ex-partner. If there is a big disparity between the two, part of your pension pot may be transferred to your ex-spouse, or vice versa. To the transferee, this is called a pension credit. In relation to the transferor, it is called a pension debit.
If you have a SIPP or are part of a defined contribution scheme, its Cash-Equivalent Transfer Value will simply be its face value. If you are a defined benefit scheme member- if you have a final salary pension, for example- calculation of the CETV must be carried out by a professional. It can be fiendishly complicated. Final salary schemes in particular can prove problematic.
This service can be carried out by an Independent Financial Advisor. You might have to seek multiple valuations if the process proves contentious. Naturally, this will result in a higher cost.
Can you share a pension in payment?
The simple answer is yes. Pension sharing orders apply even if you are already withdrawing funds from your pension plan. If your pension is a defined benefit or defined contribution scheme, the process is simple. Valuation and implementation proceeds much as it would normally.
Pension sharing is slightly more complicated when the transferring party owns an annuity and is drawing an income. In this situation, the annuity must be ‘unbought’ and there is a recalculation of the income that the owner will receive. Some types of annuity are exempt from the pension sharing process, though.
Is the pension valuation process the same across the UK?
There is variation in some aspects of divorce law between Scotland and the rest of the UK.
If you divorce through Scottish law courts, your pension will be subject to a different valuation method. Pension assets predating the marriage are not taken into account, unlike in English, Welsh and Northern Irish courts. The same goes for any pension assets accumulated after the divorce process has begun.
So if you have a big pension pot that you built up before getting married, the pension sharing order will not apply. This means that one’s CETV is generally lower in Scotland than it otherwise would be.
How are pensions divided in divorce?
At this stage a pension attachment order may be issued. This depends on whether a decree of judicial separation has already been issued
What happens next depends on what sort of pension scheme the transferee is currently a part of. The process is simple if the transferee has a personal pension. If they have a Self-Invested Personal Pension, for example, a percentage of their ex spouse’s pension fund is transferred into their plan.
This is known as pension earmarking. In the context of a divorce, you can usually transfer a lump sum amount into a defined contribution pension too.
This has its benefits, as it represents a simple clean break. But some pension schemes cannot receive these transfers. Some defined benefit pensions, for example, determine your pension income based solely on your salary and career duration. In such cases, the recipient has two other options: they may join their ex-spouse’s scheme or set up a new pension.
If the recipient decides they want to join their ex-partner’s pension scheme, the pension provider will simply split off part of their ex’s pension pot. The pension company will continue to manage this money, but it will be in the recipient’s name.
The recipient has the right to choose what happens to their pension credit. So, even if their pension provider allows pension sharing, they can still choose to place their pension credit in a new plan.
How can I get a new pension?
When setting up a new pension, you have a few options. You can open a Self-Invested Personal Pension. These give you full autonomy to manage and invest your pension pot as you see fit. You decide the level of contributions and make investments by yourself. SIPPs are a great option for those with flexibility and the expertise to know what’s best.
There are other ways to set up a new retirement plan if this doesn’t sound like the right choice for you. You may benefit from purchasing an annuity, for example. There are costs and benefits to all pension options.
If you don’t feel confident making the decision on your own, an Independent Financial Adviser can be an invaluable source of guidance. Financial advisers know how the whole system works, so their advice can help you get through the pension sharing process with no stress.
How long does it take to finalise the pension sharing arrangement?
The process is finalised through the transfer of documentation from the courts to the pension scheme administrator. In Scotland, this must be carried out within a window of 2 months from the beginning of the divorce process. There are measures by which this period can be extended.
The pension provider is then obliged to carry out any transfers mandated by the courts within a 4-month period. The company has an opportunity to appeal the decision within three weeks, but after that it is bound to carry it out.
These time-limits begin upon receipt of the relevant documentation. Failure to implement pension sharing order is a serious problem and may render the pension company legally liable.
After the process has been finalised, it is a statutory requirement that the parties are informed within 21 days.
What happens if there is a mistake in the pension sharing process?
Sometimes something goes wrong and pension sharing doesn’t turn out the way you expected. Perhaps, for example, you ended up being allocated a much smaller amount than you expected. Or maybe you think your spouse failed to report all their pension assets. There are various ways to rectify these situations, so do not panic.
You should speak to your solicitor if you think they failed to adequately represent your pension rights on divorce. They may be able to solve the problem, and if it arose due to their own mistake, you might not be charged.
If your solicitors failed to properly represent your claims in the pension sharing process and cannot rectify the situation, you may be able to take them to court on negligence charges. You could win compensation, so it is a good idea to take your grievance to court.
How does pension sharing impact my Lifetime Allowance?
As you may already know, there is a limit to how much you can have in your pension pot. Over this threshold, you will not be able to benefit from the various tax advantages that pension schemes provide. This is called the Lifetime Allowance.
Until 2009, you could apply for a larger Lifetime Allowance so the division of pensions on divorce would not push you over the limit. But this is no longer the case. Any pension credit you receive is added to the rest of your retirement savings for the purposes of the Lifetime Allowance. A pension sharing order does not come with tax exemption.
At the same time, if you have to transfer a pension debit to your ex-partner, this reduces the value of your pension pot. So you could have more of your Lifetime Allowance spare following your divorce.
Does a pension sharing order affect one’s retirement age?
The answer to this question is a simple no. One’s pension age remains the same following divorce. One cannot start drawing on pension benefits just because one has benefited from a transfer.
Would you like some help with a pension sharing order?
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Learn more about pensions in the UK
Defined Benefit Pensions
A defined benefit pension is often seen as a gold-plated pension. Read our guide which sets out how they work.
Pension drawdown is increasingly becoming a popular way for people to access their pension pot at retirement. Read about how it works here.
Pension Transfer Advice
When it comes to deciding what to do with your pension, it is best to take advice. This article discusses what advice will cover.
can i transfer my pension myself?
Some people feel confident enough to want to arrange the transfer of their pension themselves. This article looks at what you should consider.
Defined Contribution Pensions
Defined contribution pension schemes are what most private sector employees have. Our guide explains what you need to know about them.
A pension annuity gives you a guaranteed income through retirement. They are still a popular choice. Read about how they work here.
Pension Sharing Order
When you go through a divorce, pension sharing order sets out how the pension will be split. This article explains how they work.
Can I cash in a pension from an old employer
If you have a pension with a past employer, it will still have a value and you will have options with it. This article looks at what you can do.
Self-Invested Personal Pensions
A Self-Invested Personal Pension is a type of vehicle used by people that want more control over their investments. Read more here.
Pension Transfer Charges
People want to transfer their pensions for a range if different reasons. This article looks at what the costs could be.
Can I cash in a Frozen pension?
Most people will have a pension with their past employers. However, you still have a number of options as to what you can do with it.
How to avoid Inheritance Tax in the uK
Avoiding inheritance tax is an effective part of your estate planning. This article looks at what you can do to reduce tax on your estate.
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