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 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 HvH1.
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 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 August 2018 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.