Dividing assets during a divorce or dissolution of a civil partnership can be a complex process, particularly when it comes to pension arrangements. Pensions often represent a significant portion of a couple’s financial assets, and understanding how they can be shared is crucial to ensuring a fair settlement.
This guide provides an in-depth look at pension sharing orders, how to apply for a pension sharing order, and what to consider when navigating this legal process.
What Is a Pension Sharing Order (PSO)?
A pension sharing order (PSO) is a legal mechanism that allows a pension fund to be divided between spouses or civil partners upon divorce or dissolution of a civil partnership. This enables the recipient to receive a portion of the pension assets, known as a pension credit, which can either remain in the existing pension arrangement or be transferred into a new scheme.
A PSO is particularly beneficial for those who have contributed significantly to a pension scheme during their marriage or civil partnership, ensuring that both parties have access to financial stability in retirement. Unlike other methods such as a Pension Attachment Order (sometimes referred to as an earmarking order), a PSO provides a clean break, ensuring financial independence between former partners and allowing each person to manage their pension benefits separately.
How Is a Pension Sharing Order Calculated?
The calculation of a PSO is based on the cash equivalent transfer value (CETV) of the pension fund. This figure represents the amount the pension provider would transfer if the pension were moved to another scheme. When considering a PSO, it is important to obtain the equivalent transfer value (CETV) from the pension provider to assess the total worth of the pension assets.
Different types of pensions may have varying CETVs, and defined benefit pensions can be particularly complex to value. Seeking expert legal advice and consulting a financial advisor can help ensure that the valuation is fair and accurately reflects the long-term value of the pension.
The court will consider several factors when making a Pension Sharing Order, including:
- The length of the marriage or civil partnership
- Each party’s financial situation, including other income and savings
- Future financial needs, including state pensions and other investments
- Whether a clean break is achievable without ongoing financial dependency
A PSO is legally binding and ensures that once implemented, neither party has further claims over each other’s pensions, creating a decisive financial separation.
Steps to Apply for a Pension Sharing Order
-
Obtain Legal Advice
Before taking any steps, it is essential to obtain professional legal advice. A solicitor specialising in family law can help you understand your rights, evaluate your options, and ensure the best outcome. They will also assist with drafting and submitting the necessary paperwork to the court.
-
Obtain Pension Valuations
Each party should obtain a cash equivalent transfer value (CETV) for their pension assets, in addition to obtaining documents in respect of the finances generally. This information is necessary for negotiations and determining how pension benefits should be divided. Different types of pensions may require additional documentation, so it is best to request this information early in the process.
-
Negotiate a Settlement
A fair settlement may be reached through direct negotiation, mediation, or solicitor-led discussions. If an agreement is made, it will be formalised in a consent order, which outlines how pension assets and other finances will be divided.
Mediation is often a cost-effective and less adversarial approach to reaching an agreement. However, if discussions fail, court proceedings may be necessary to determine how the pension should be divided.
-
Submit an Application to the Court
If an agreement is reached, a solicitor can draft the pension sharing order as part of the consent order and submit it to the court. If parties cannot agree, a judge may impose a PSO as part of the divorce or dissolution settlement. The court will assess whether the division is fair and reasonable before approving the order, with particular reference given to each parties’ individual needs following the divorce or dissolution.
-
Implementation by Pension Provider
Once the court issues the order, the pension provider implements the pension sharing order. This process typically takes a few months but may take longer, depending on the complexity of the pension arrangement.
The pension provider will create a separate pension pot for the recipient or transfer the pension credit to a new scheme chosen by them. It is important to check with the provider about any administrative fees associated with the transfer.
Understanding Pension Credit and Death Benefits
The recipient of the PSO will receive a pension credit, which can be transferred into a pension scheme of their choice. It is important to check the rules of different pension arrangements to ensure the best outcome. If you are the recipient of the pension credit you may wish to consult an independent financial adviser, in order to figure out what is the best option for you.
In terms of death benefits, how they are distributed depends on the rules of the pension scheme and whether the pension has already been accessed. Some schemes allow beneficiaries to inherit remaining pension benefits, while others may have different rules. If you receive a pension credit, you may want to update your beneficiary details to ensure your pension assets are distributed according to your wishes in the event of your passing.
State Pensions and Pension Sharing Orders
It is important to note that state pensions are not subject to a pension sharing order, except in limited circumstances involving additional state pension entitlements. However, divorce or dissolution of a civil partnership can impact state pensions entitlements, so it is advisable to check National Insurance records to understand any potential impact.
If you have built up additional state pension entitlements, some elements of these may be transferable as part of a financial settlement, but this is rare. Understanding your projected state pension entitlement and any gaps in your contributions is crucial when planning your financial future post-divorce.
Alternatives to Pension Sharing Orders
While a PSO is a common method of dividing pension assets, other options may be considered:
- Offsetting: One party keeps the pension fund while the other receives a greater share of other marital assets, such as property. This can be an attractive option for those who prefer liquid assets over pension income. It is important to note that if parties are going down the route of offsetting, then a percentage reduction in credit may be applied to reflect the widely-accepted position that ‘money now is better than money later’, as offsetting affords greater flexibility to the recipient to choose how to re-invest this capital than if it were credited to the recipient’s pension, which may not be accessible for years to come.
- Earmarking Orders: This allows for a portion of the pension benefits to be paid to an ex-spouse upon retirement, though it does not provide a clean break. The downside is that the recipient remains financially tied to their ex-spouse and does not control when the payments begin.
What Happens if One Party Passes Away?
Death benefits associated with the pension fund must be considered when arranging a PSO. If the pension holder passes away before the order is finalised, the division may be affected. A solicitor can advise on how to structure a settlement to minimise financial risks. Ensuring proper beneficiary nominations and reviewing pension policies can help prevent complications.
Conclusion
Applying for a pension sharing order ensures that both parties receive a fair share of pension benefits after a divorce or dissolution of a civil partnership. By seeking legal advice, gathering relevant information, and obtaining a consent order, individuals can secure their financial future.
Pensions are often one of the most valuable assets in a divorce, and understanding your rights is essential to achieving a fair outcome. Whether you choose a pension sharing order, offsetting, or another method, careful planning and professional guidance can make a significant difference in securing long-term financial stability.
Contact Harbour Family Law for more expert advice on Pension sharing today.