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Pension sharing orders - The FAQs

Introduced in the Welfare Reform and Pensions Act 1999, pension sharing enabled the courts to split pension rights between a husband and wife or civil partners at the time of the divorce. The legislation became effective on 1 December 2000 for divorce and annulment proceedings starting on or after that date. It does not apply retrospectively.

The primary objective of pension sharing was to give couples and the courts greater flexibility and choice, by allowing pension rights to be treated in a way which provides for the fairest overall settlement of assets in each case.

The aim of pension sharing is to separate the ex‑spouse’s/former civil partner’s pension entitlement from the member’s pension so that there is a clean break. In England and Wales, a pension sharing order can only be expressed as a percentage of the cash equivalent transfer value (CETV) as defined in the Matrimonial Causes Act 1973, s.21A(b) and subsequently clarified in HvH.

In Scotland, a monetary amount or a percentage of the CETV can be specified. This is particularly important given that the value of the pension may have changed substantially between the point of separation and the date that the pension debit is actioned. When a pension sharing order is issued a ‘pension debit’ will be created in relation to the member’s rights (that is, the amount to be deducted) and an equivalent ‘pension credit’ will be provided for the ex‑spouse/former civil partner.

Pension sharing orders can be made in respect of:

  • Occupational schemes, including AVCs
  • Registered individual pension schemes (for example, personal pensions, stakeholder pensions, retirement annuity contracts and section 32s)
  • Statutory schemes (for example, public sector schemes)
  • Unapproved schemes (for example, employer‑financed retirement benefit schemes)
  • State earnings related pension scheme (SERPS) and State Second Pension (S2P), where State Pension age was reached before 6 April 2016 

They can be ordered against active, deferred and pensioner members and will apply to contracted‑out benefits in the same way as they would to other benefits.

The following pensions cannot be shared:

  • Basic State Pension
  • Graduated pension
  • Widow or widower’s pension that is in payment

In a defined contribution arrangement, the pension debit is simply a reduction in the value of the pension holder’s fund. Where defined benefit schemes are involved, matters become more complicated. The pension debit equates to a proportion of the benefits that would be payable to the member at their Normal Scheme Retirement Date. Ordinarily the pension would therefore be a split of the CETV calculated in the normal way (that is, with the scheme benefits revalued to the date of retirement and deducted back from the final benefits and the cost capitalised). However, alternative approaches are possible.

Couples divorcing in Scotland can reach a pension share agreement by a court order or by completing a registered Minutes of Agreement. However, in both England and Wales, this can be achieved only by a court order.

The options available to the ex‑spouse/former civil partner will depend on the type of scheme to which the member belonged and the rules of that scheme.

All providers of funded pension arrangements (excluding those transferred to the Pension Protection Fund (PPF) and any pensions already in payment), must allow the ex‑spouse/former civil partner to transfer a pension credit to another registered pension scheme of the ex‑spouse’s/former civil partner’s choosing, subject to the receiving pension arrangement being able to accept the transfer.

Where the individual is a member of an unfunded pension scheme (for example, most public sector schemes such as the Civil Service scheme and the Teachers’ scheme), the pension credit rights in respect of the ex‑spouse/former civil partner must be retained under the scheme.

Other schemes may at their discretion offer the ex‑spouse/former civil partner membership of the scheme in their own right. In this instance they would enact an ‘internal transfer’. Where this is offered, the pension credit benefits are not required to be on the same basis as those in the scheme. For example, the pension credit may be on a defined contribution basis even though the scheme is a defined benefit or career average scheme.

Schemes are however permitted to insist on a transfer out. In this instance, the member will initially be given the choice of selecting the receiving scheme. Where a choice is not forthcoming from the ex‑spouse/former civil partner, the scheme may give notice that they intend to transfer the benefits to a default s.32 arrangement of their choosing. A transfer to a personal pension cannot be used as a default under current legislation. If a pension credit is awarded in relation to a scheme that has been transferred to the PPF, the PPF will pay compensation to the ex‑spouse/former civil partner, who will not be allowed to transfer out of the scheme. The ex‑spouse/former civil partner could become entitled to a share of the pension holder’s SERPS/S2P benefit (a ‘shared additional pension’), but this would not be transferable in any way.

The single-tier State Pension
Administration of the pension sharing orders and charges
Annual allowance

Advantages of pension sharing

  • It achieves a clean break
  • It helps to ensure both parties will have pension provision available in retirement
  • Provides security for the non‑pension member ex‑spouse/former civil partner who will have ownership of their own scheme, which is not in any way dependent on the member
  • A share of the capital is provided, which may be needed to help one party re‑house or meet other immediate financial commitments (subject to being over normal minimum pension age and the pension not being in payment already)
  • Each party will receive the full benefit of any pension contributions they make following the split
  • Remarriage, death or other change in circumstances will not affect the order

Disadvantages of pension sharing

  • The member’s future lump sum and income provision will be reduced
  • The actual debit (the reduction in pension as a result of the order) will not be known until retirement
  • An implementation fee will be payable to the pension provider which can be significant and may be disproportionate to the benefits of the pension
  • The non‑pension member ex‑spouse/former civil partner may not be able to receive the pension until the date specified by the rules of the member’s pension scheme, or the rules of any scheme the pension credit is transferred to
  • It may be difficult to split some pensions. For instance a Small Self‑Administered Pension Scheme (SSAS) could have investments in commercial property which is used by the members’ business, making it difficult to obtain an accurate valuation and implement the order. The scheme may need to raise money in order to pay out the non‑member ex‑spouse/former civil partner, and where there are other members, the other members will need to give agreement to the pension sharing order
  • For high earners, care may be needed because of the effect the pension credit has on the recipient’s lifetime allowance, that is, adding additional funds – which need to be tested for lifetime allowance (LTA) purposes – could mean they become liable to an LTA charge when tested (see our pension and divorce guide for more details on LTA implications)

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Important information:

The suitability of various options for pensions on divorce will depend on the particular circumstances of each individual. Different options may have different effects for tax purposes, different implications for pension provision and different impacts on other assets and financial planning, as well as different legal impacts on the distribution of assets on divorce.

This page provides information and is only intended to provide an overview of the current law in this area as at December 2019 and does not constitute financial advice, tax advice or legal advice, or provide any recommendations. This is a complicated area, and individuals going through a divorce should take tailored, appropriate advice about their financial settlement on divorce and future tax and financial planning.

Tax limits, allowances and rules are often subject to change and may change in future. Individuals should check that tax limits, allowances and rules have not changed.