Pension Sharing

Pension Sharing

Pension benefits that have been accrued are valued.  That value is then shared or "split" and invested separately in the names of the two divorcing parties involved.

Pension sharing is the third option available when dealing with pension benefits on divorce, the other two options being offsetting and earmarking.

Pension sharing was introduced by the Welfare Reform and Pensions Act (1999) and is available for all divorce proceedings that commenced on or after 1 December, 2000.

Learn about Pension Sharing:

• How Is It Shared?
• Working Out The Value
• Losing Pensions
• Gaining Pensions
• Pensions Being Paid
• What Can Be Shared

Also known as "pension splitting", pension sharing gives the opportunity in divorce negotiations to enable a clean break between parties.

It means that both the member of the pension scheme and the former spouse secure, in their own right, a pension for retirement.

Contact us today for help with your pension sharing.

1.  Private Pensions

Pension sharing orders on divorce can apply to all types of pension arrangements:

• Company Occupational Pension Schemes
• Personal Pension Arrangements
• Stakeholder Pensions
• Section 32 Transfer Buy Out Policies
• Older style Retirement Annuity Private Pensions (also known as s226 or s620 Policies)
• Unapproved Pension Arrangements

State Pensions

Pension sharing may even apply to State pension scheme benefits such as State Earnings Related Pension Schemes (SERPS) and The State Second Pension Scheme (S2P). 

Pension sharing does not however apply to the Basic State Pension.

2. Pensions Being Paid

Where divorce proceedings take place and a member is already being paid pension benefits i.e.  pension income, the ex-spouse may be entitled to a share of this pension in their own name.

This will involve a number of rather complex calculations to value the pension being paid by converting it to a lump sum figure.

Once the value has been calculated, the share to be allocated to the former spouse can be transferred to a policy in the name of the former spouse and a pension income is then paid to the former partner.  There are a number of issues in this regard and we suggest that you seek professional advice from us.

There are many alternatives that the ex-spouse may consider when being allocated a share of a pension that is being paid, such as starting an income immediately as well as pension fund withdrawal, phasing in retirement or deferring retirement income altogether.

We suggest you take a look at Pension Debits and Pension Credits rules regarding pensions in payment and how they affect your lifetime allowances.

3. Gaining Pensions

The pension sharing benefit that is transferred to you from your former partner's pension is known as a "pension credit".  

Pension Credits: How do they affect me?

Being awarded a pension credit generally does not affect most recipients, but it may affect you and restrict how much you may pay in pension contributions in the future if your pension fund is or becomes quite large.

• Pension Credits affect your overall pension lifetime allowance this means that it uses up part of your lifetime allowance.
• Any pension credit does not count against your normal pension contributions annual allowance.

Please note that pension sharing rules changed on 6 April 2006 with Pension Simplification and if your pension sharing order was issued before this date, there are now transitional rules.  

Old Pension Credit Rules Before 6 April 2006 

Any transferred benefits to a former spouse used to not affect the maximum retirement benefits that the former spouse can take at retirement.

For example, if the former spouse built up a pension benefit up to the H M Revenue and Customs maximum amount (for a company occupational pension scheme this may  be a pension of two thirds of final salary) - then the former spouse could have had additional earmarked benefits over and above their own pension benefits, with no restriction.

This meant that you may actually get more pension than that which would normally be allowed under Inland Revenue rules.  This position has changed for new pension credits after 6 April 2006 as mentioned at the start of this text.

Transitional Rules for Pension Credit in force before 6 April 2006

Pension income not being paid yet: A pension sharing order that was completed and in force before 6 April 2006 but not yet being paid will not affect you or your former partner's pension allowances and will be ignored rather than restrict you as is the case for new pension credit orders.  

Pension income already being paid: A pension sharing order that was completed and in force before 6 April 2006 and the pension was already being paid as income does technically affect your lifetime allowance as it has already been taken into account in your former partners pension lifetime allowance calculations and therefore 'used up' some of their lifetime allowances and not yours.

4. Losing Pensions

The pension sharing benefit that is transferred away from your pension and into a pension in the name of your ex-spouse will show in your records as a "pension debit". 

It may also be referred to in certain types of pension scheme as a "negative deferred pension".

Pension Debits:  Can I make up for my lost pension?

You are freely allowed under new rules that started on 6 April 2006 to make up for lost pension and pay in more pension contributions.

• Pension debits do not affect your overall pension lifetime allowance, this means you can make up for lost pensions.  They now affect your former partner's lifetime allowance.
• Any pension debit does not count against your normal pension contributions annual allowance.

Please note that pension sharing rules changed on 6 April 2006 with Pension Simplification and if your pension sharing order was issued before this date, there are now transitional rules.

Old Pension Debit Rules Before 6 April 2006

• Company Directors and Higher Earners:  Broadly speaking, under the old rules if you were a Company Director or if you earned above around £27,000 pa, you were not allowed to make up for the pension you had lost by paying additional pension contributions above your normal yearly HM Revenue and Customs Limits.
• Lower Earners: You were allowed to pay additional monies into your pension over and above your normal yearly HM Revenue and Customs Limits to make up the lost pension rights.

Transitional Rules for Pension Debits in force before 6 April 2006

Pension income not being paid yet:  A pension sharing order that was completed and in force before 6 April 2006 will now not affect your pension allowances and will be ignored rather than restrict you as was the case for company directors and higher earners before April 2006.

Pension income already being paid:  A pension sharing order that was completed and in force before 6 April 2006 and the pension was already being paid as income does technically affect your lifetime allowance as it has already been taken into account in your pension lifetime allowance calculations and therefore 'used up' some of your lifetime allowance.

5. Pension Valuation

This is done by the calculation of a cash equivalent transfer value (CETV) of the pension benefits that have been built up.

Care then needs to taken when deciding which type of policy the ex-spouses entitlement is transferred into.

Our highly qualified staff provide a divorce and pensions analysis service to help value accrued pension rights for use when negotiating divorce settlements.

Visit the Pensions Valuation Analysis Service for details.

6. How its Shared

Pensions can be shared in two ways:

• The ex-spouse is offered a cash equivalent transfer value for all or a share of the members pension benefit.  This can then be transferred to a policy in the ex-spouses own name.  It is a requirement that all private pension schemes are dealt with in this way.
• The ex-spouse may be offered the option of becoming a member in their own right in the members pension scheme.  This may be offered at the discretion of the trustees or the manager of the pension scheme.  This route may not be as common as there may be additional costs incurred by the pension scheme and they may prefer to transfer pension monies out into a separate arrangement for the ex-spouse.  Making the ex-spouse a member may be more common for schemes where there are no actual funds built up, such as government pension schemes.  With these types of scheme the pension benefits are a future promise, backed by government guarantee.  No money is physically invested.

Charges for pension sharing

When dealing with pension sharing issues, the trustees or managers have a right to make charges for additional costs in dealing with pension sharing arrangements.

They can do this by making a charge or alternatively by making a deduction from the members pension fund.