Introduction to Pension Sharing on Divorce
Published / Last Updated on 17/11/2023
History of Pension Sharing on Divorce
Before 1996 the only real option for divorcing parties was covered by the Matrimonial Causes Act (1973) where English and Welsh courts were given the power to consider the value of pensions as part of a financial settlement between divorcing parties although they did not have to do so (and many did not). It was usual then for the person with the largest pension to keep it and offset its value against the value of other matrimonial assets e.g., you keep the house, I keep the pension. This is known as clean break/offsetting.
On 1st July 1996, the Pensions Act 1995 came into force that allowed part of a pension to be earmarked for their ex-spouse when retirement was reached. The problem was that the member was still in control of the pension i.e., when to take it and where to invest it. So many aggrieved pensions scheme members simply kept postponing when they took their pension meaning their ex-spouse had to wait to get their earmarked share of the pension or some members even invested the earmarked pension badly to lose money meaning that their ex-spouse received an even smaller share of the pension income earmarked for them.
Earmarking Flawed
There were even some earmarking orders worded to earmark only pension ‘income’ or only pension ‘lump sums’ and therefore, some scheme members would take their whole pension as income if the earmarking order had awarded the ex-spouse a share of a lump sum on retirement, so they got nothing or a much reduced earmarked pension income and vice versa, if the earmarking order was for pension income but the member might take the maximum lump sum (not earmarked) to reduce the residual pension income or in some cases, for pre-1987 pension schemes, some pension could be taken all as a lump sum meaning no pension income at all and if the earmarking order was pension income for the ex-spouse then there would be no pension income whatsoever for the ex-spouse.
Pension Sharing
There was so much trouble to the point that the Welfare Reform and Pensions Act (1999) introduced Pension Sharing i.e., by court order, the pension must be shared immediately between the divorcing couple. Pension Sharing as we know it today started on 1st December 2000.
For more read: Divorce Pension Share Sharing
Whether a financial agreement can or cannot be reached, the courts now have the power to issue a pension sharing order, with the pension professionally valued and then separated into two parts. One share for the member and one for the ex-spouse. The shared pension rights are usually then invested into a separate policy for the ex-spouse in their own name.
- The court’s ‘Attachment’ or Sharing Order is attached to the divorce settlement.
- The Order is then sent to the member’s pension scheme ordering them to share the agree amount with the ex-spouse.
- The ex-spouse should have or be taking professional advice e.g., from us to advise on what pension scheme is best for their pension share to be transferred to.
- The member’s pension scheme then sends the agreed transfer value to the ex-spouse’s designated pension.
- The pension scheme is then in the sole name of the ex-spouse to control how he/she sees fit and to retire when they want to and in what combination of income or lump sum they want to.
