Pension Sharing on Divorce Facts

Pension Sharing History

Before 1973 there was no requirement on the courts to consider any sharing of built up pension benefits for divorcing couples.

Matrimonial Causes Act (1973) - Pensions are taken into account

This gave the courts powers, in England and Wales, to take into account the values of any private pensions when structuring a financial settlement for divorce - although they did not have to do so.  The pension monies could still not be taken away from the member.  A similar law was passed in Northern Ireland in the Matrimonial Causes (Northern Ireland) Order 1978.

Scotland 1985 - The Family Law (Scotland) Act (1985)

The law defined a pension as now being part of "matrimonial property" i.e.  the assets within the marriage.  Meaning that a pension should be included in the overall value of the matrimonial property and be divided up accordingly.  Therefore, in Scotland the value of the pension had to be taken into account.

Generally speaking at this point for all areas of the UK, the person with the highest pension value retained it and took a smaller share of the remaining assets from within the marriage.

This is generally known as 'offsetting'.

Pensions Act (1995) - Earmarking

For divorce applications made after 1 July 1996, the courts were given the power earmark (literally reserve) part a persons pension benefits on behalf of another.  There was still the option of offsetting other assets against the value of the pension as above, however, if agreement could not be reached, the courts had the power to issue an earmarking order to reserve some or all of a persons pension benefits for an ex-spouse.  More on earmarking

Welfare Reform and Pensions Act (1999) - Pensions Being Shared (i.e.  separated into two pensions)

There were some slight changes in law made by the Family Law Act (1996) and this has now been superseded by the Welfare Reform and Pensions Act.  This act now provides a third option for couples who commence divorce proceedings on or after 1 December 2000.  If agreement cannot be reached by normal means the courts now have the power to issue an order, have the pension valued and then separated into two parts.  One pension for the member and one for the ex-spouse.  The shared pension rights can be invested into a separate policy in the individuals own name.

More divorce and pensions facts in this section:

1.  Pension Divorce Rights

If you are divorcing you need to be aware that there are some basic divorce rights that may be available to you with regard to provision for a pension income when you retire.

The ideal aim within any divorce negotiation is obtain aclean breaksettlement.  However, more frequently affairs are more complex and a simple solution cannot be found.

Men are four times more likely to have built up substantial pension benefits than women, according to the Department of Social Security in 1995.  Women, generally speaking, build up smaller pension benefits than men as a number take career breaks to raise children etc.  This may lead to financial difficulty in retirement.

The law has therefore developed to allow assets to be distributed fairly.  It may be that pension benefits remain as they were but the party with little or no pension benefits receives a greater share of the other assets from the marriage.  This is known as offsetting.

Other ways to distribute pension assets are to earmark (technically reserve) pension benefits for the other party or more recently to be able to share the benefits (divide the pension and transfer the benefits into a separate, identifiable pension pot).

If you are the party who has to give up part of your pension rights you may be able to make up this shortfall in your pension by making additional contributions.

2.  Pension Divorce Clean Break

This means exactly what you think it means.  A complete financial settlement between divorcing couples.  This is ultimately the aim of everybody as it means that all financial issues have been settled.  There may, therefore, no longer be a requirement to remain in contact with your ex-spouse after divorce.

The reality is that this is often difficult to achieve.  There may be children involved and other assets that are significant e.g.  pensions.

A common approach to achieving a pension divorce clean break settlement is to offset the value of assets against other assets.  For example one party could say retain the former matrimonial home and the contents whilst the other party retains the car and pension benefits to an equivalent value.  This is known as offsetting.

If there are not enough non-pension assets to offset against the value of the pension then the possible options open are to either:

Earmark pension benefits for divorce proceedings after 1 July 1996 in England and Wales, 19 August 1996 in Scotland.

Share pension benefits for divorce proceedings after 1 December 2000.

3. Pension Offsetting

Offsetting is where the value of pension assets are calculated and set against the value of other assets from within the marriage.

For example, a separating couple have assets as follows:

Joint assets

• House equity £43,000
• House contents £7,000
• First car value £4,000
• Second value £2,000

Total Joint Assets £56,000

Other Assets

• First person - a pension cash equivalent value of £10,000
• Second person - a pension cash equivalent value of £62,000

(To find out how we work out a cash equivalent pension value, see below)

A Possible Offsetting Solution:

First person retains:

• The house £43,000
• The contents £7,000
• A car £4,000
• Pension £10,000

Total value of assets retained = £64,000.

Second person retains

• A car £2,000
• Pension £62,000

Total value of assets retained = £64,000

This settlement example is in simple terms but hopefully demonstrates how offsetting works.

What if there are not enough assets to offset?  How do you divide a pension?

If there are not enough non-pension assets to offset against the value of the pension then the possible options open are to either:

• Option 1 - Earmark pension benefits  can be used for divorce proceedings after 1 July 1996 in England and Wales and 19 August 1996 in Scotland.
• Option 2 - Share pension benefits  can also be used for all divorce proceedings after 1 December 2000.

For more on offsetting your pension for divorce contact us today.

4. Court Order

When a decision is made in court with regard to pension provision it is done via a court order.

If the order is made where the divorcing couple have agreed how assets are to be shared it is known as a consent order.  With a consent order, the courts merely confirm and agree the order.

If agreement cannot be reached then all financial information is supplied to the courts and a decision is made by the courts on how the matrimonial assets are to be divided.  This will be done in the form of a property and maintenance order.

With regard to pension provision, if the estate is not divided up with the pension benefit being offset against other assets then an order to earmark or share the pension will be issued.

5. Valuing a Pension

In simple terms the cash equivalent transfer value (CETV) of a pension is worked out as follows:

• The preserved pension benefit, i.e.  the value of the pension accrued to date that would normally be taken at retirement date, based on today's figures is given.  This provides a pension figure in today's terms.
• The benefit is then revalued from today's date to the normal retirement date - to give a pension figure in future price terms - an assumption is made as to the likely increases in salary, prices etc.
• The cost to purchase the pension in the future is then valued.  This is the lump sum amount that would be required to purchase the pension benefit at the future retirement date.  This is worked out using an annuity rate assumption.
• This lump sum amount is then discounted back to a figure.  The discount factor is effectively the investment return required on a particular figure to provide the projected sum at retirement date.

For example, if a person has an accrued pension today of £10,000 per annum.  If this was then revalued to a normal retirement date in 20 years at 5% per annum it would be a pension worth £26,533.

The cost to provide this pension at an annuity rate of say 6.5% would be £408,200.

With a projected investment return of say 7%, to achieve the target cash sum required of £408,200 at retirement date - you would need to invest today £105,487.

£105,487 is, therefore, the cash equivalent transfer value in this very simple example.  It is very easy to see how pension benefits can become a huge part of negotiation and a huge thing to lose in any divorce settlement.

Please note this example is a simplistic, entirely fictitious calculation.  All rates and assumptions use are just to illustrate the process of how a cash equivalent may be worked out.  You need to seek professional help when valuing pension benefits.  There are many other benefits within the pension scheme that affect its current and future cash value.

We offer an evaluation service for parties and legal representatives involved in divorce together with advice and guidance on the value of the pension which may prove crucial in divorce negotiations.  Contact us today to discuss your requirements.

Pension Divorce Earmarking

Pension divorce earmarking is the process of reserving a pension benefit for another. 

In this section we look at exactly what pension divorce earmarking is, the advantages and disadvantages of pension divorce earmarking and which types of pension scheme can be earmarked.

Earmarking Explained:

• Reserving pensions benefits for a former spouse
• Advantages of earmarking
• Disadvantages of earmarking
• Types of pension scheme that can be earmarked

Contact us today to learn more about pension divorce earmarking.

1.  Pension Divorce Reserve

Pension Divorce Reserve was introduced by the Pensions Act (1995) and gives courts the power to issue an order to earmark pension benefits accrued by one party for the benefit of another.  This is done by issuing and serving an order on the trustees of the pension scheme.

Earmarking is possible for all divorce proceedings that commenced on or after:

• 1 July, 1996 - England and Wales
• 19 August, 1996  - Scotland
• 6 April, 1997 - Pensions that are already being paid to a person

Powers of the Court:

• Can order that all or part of the pension benefit is paid at retirement to the former spouse
• Part or all of the pension benefits can be converted into a cash sum and paid over to the former spouse at retirement
• Can order that part or all of any lump sum due plus part or all of a pension income can be paid to a former spouse
• That part or all of any death in service benefits are paid to the former spouse         
• Please note that in Scotland only lump sum orders can be made.

In simple terms, part or all of a retirement benefit is reserved for the benefit of another.  This has to be done via a court order.  This means that this may only happen if financial settlement divorce negotiations have not been successful and the matter has gone to court.  At the retirement date, the part of the benefit reserved for the former spouse is paid to the former spouse.

Get some expert advice about pension divorce reserve

Our highly qualified staff provide divorce and pensions analysis service to help value accrued pension rights for use when negotiating divorce settlements.  Get some pension advice right now.

2. Advantages of Earmarking

The advantages of pension earmarking are the person with the smaller (if any) retirement provision has the benefit of some additional provision at retirement from the member of the pension scheme.

Any earmarked benefits for a former spouse do not affect the maximum retirement benefits that the former spouse could take at retirement.

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

This means that they actually get more pension than they would normally be allowed.

Earmarking enables divorce proceedings to reach a conclusion.

3. Disadvantages of Earmarking

Death - If the pension scheme member dies, the order ceases.  This may leave the former spouse with reduced or maybe no benefits depending on if any death in service provision has been made.  If death is after retirement and a pension income is being paid, this also ceases immediately upon death of the member of the pension scheme.

Control - The pension scheme member has total control over the pension.  The member decides where the pension monies are to be invested (if applicable), the pension scheme member also decides when to retire e.g.  the member could delay retirement until aged 75! The former spouse has no control and has to wait until the member decides when to retire before being allowed to receive any benefit.

Contact - The pension scheme member or the trustees or managers of the pension scheme have no duty to keep in contact with the former spouse or notify when benefits are likely or due to be paid.  It is up to the former spouse to maintain contact.

Remarriage - The former spouse may lose all rights to any share of the previous spouses retirement benefits if they remarry.  This normally happens to earmarked pension income benefits although lump sum benefit orders normally remain in place even after marriage.

Shortfall - The member who gives up part of their pension rights is not allowed to make up the loss of benefits by making any additional pension investments.  The member is allowed to make additional contributions up to their maximum pension benefit allowed by the Inland Revenue (for a company occupational pension scheme this may be a pension of two thirds of final salary) - but this maximum includes any amount given to a former spouse.

No guarantee - The difficulty with earmarking is that there is no guarantee that a benefit will be paid (e.g.  there may be poor investment decisions made by the pension scheme member that reduces the pension) or there is no guarantee when the pension will be paid out - the member chooses when to retire.

4. Types of Pension scheme that can be earmarked on divorce

Earmarking orders can be applied to:

• Company Occupational Pension Schemes

• Personal Pensions

• Stakeholder Pensions

• Additional Voluntary Contribution Schemes

• Section 32 Transfer Buy Out Policies

• Older style Retirement Annuity Private Pensions (also known as s226 or s620 Policies)

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.