If you are going through a divorce and you and your ex-spouse
are looking at dividing up your assets, the Court is required to
take your pension rights into account.
Through the Court, a divorcing couple can choose to:
- balance the pension rights against another asset, such as the
matrimonial home (this is known as Pension Offsetting);
or
- arrange that when one party's pension eventually comes into
payment, a portion of it will be paid to the other party (this is
known as Pension Earmarking);
or
- split the pension at the time of the divorce to give both
parties their own pension pot for the future (this is known as Pension Sharing).
Generally speaking, you will need to know what you and your
former spouse's pensions are approximately worth. This will mean
that both of you will need to ask your pension providers for
valuations of your own pension pots. Your former spouse will not
have any right to know what your pension value is without your
consent.
You will also need to understand the implications
of each of the three methods of taking pension rights into account
in a divorce settlement.
Be aware that transferring from a final salary or career
average scheme to a money purchase scheme (or personal pension plan)
carries a number of risks. You should seriously consider
taking independent financial advice before sharing a pension so
that you understand whether you are getting value for money.
The Court can issue a Court Order to occupational pension
schemes (funded and unfunded, approved or unapproved), personal
pension schemes, retirement annuity
contracts, and Section 32 Buy-out Plan.
The Court can consider pension plans that you and your former
spouse are currently paying into, plans that you have frozen in the
past and plans that are currently paying you an income.
Arrangements that are outside the scope of the legislative
provisions covering divorce are state benefits, Equivalent Pension
Benefits earned between 1961 and 1975, and any pension rights a
person is in receipt of by virtue of being a widow, widower, or
dependant.
Pension Offsetting
All the couple's assets are taken into account and pension
benefits are offset against other assets (e.g. the matrimonial
home). The party with the pension rights keeps them for him/herself
and the other party is given the benefit of other assets, such as
the right to live in the matrimonial home.
It can be difficult to achieve a fair share of a couple's total
assets by offsetting a pension pot against other assets. This may
be because pension pot is by far the greater in value. Also pension
values tend to fluctuate more than, say, property values. If it
turns out to be difficult to achieve offsetting, one or other of
the alternative bases is then likely to be used.
Earmarking
Pension Earmarking was introduced by the 1995 Pensions Act, for
divorce petitions filed on or after 1 July 1996 (or 19 August 1996
in Scotland).
The pension scheme, on instruction from the Court, pays a
specified amount of the member's pension and/or lump sum (in
England, Wales and Northern Ireland) or a specified amount of the
member's lump sum only (in Scotland) to the ex-spouse. The amount
is specified at the time of the divorce but as with all periodical
payment orders, either party can apply to the Court to have the
amount varied. The payment is made when the spouse with the pension
pot retires, say, or when they die.
Earmarking has not proved entirely satisfactory in practice, as
it does not achieve a 'clean break' and does not enable the
ex-spouse to receive retirement income until the spouse with the
pension pot retires. An additional drawback is that if the Divorce
Order is for the regular payment of a pension, those
payments will stop when the spouse with the pension pot dies or if
the party receiving the earmarked pension remarries (for reference,
the right to a lump sum under an Earmarking Divorce Order does not
stop on remarriage).
Pension Sharing
The Welfare Reform & Pensions Act 1999 gave powers to the
Court to split pension rights between husband and wife on divorce.
This legislation is not retrospective and only applies to
proceedings for divorce or annulment filed on or after 1 December
2000.
The basic concept is to separate the ex-spouse's benefit
entitlement (as specified in the Court Order) from the pension
scheme member's, so that there is a 'clean break'. A Pension
Sharing Order is issued that creates a Pension Credit Member (the
ex-spouse) and a Pension Debit Member (the member).
The Pension Credit is based on the member's Cash Equivalent
Transfer Value (CETV). The Credit will be a percentage of the CETV,
not a fixed sum of money. The CETV is calculated as of the day
before the Pension Sharing Order takes effect, so it can be higher
or lower than the value disclosed at the start of the divorce
proceedings. The Pension Sharing Order takes effect from 'the date
on which the Decree Absolute of Divorce or nullity is pronounced or
if later, either (a) 21 days from the date of this Order, unless an
appeal has been lodged in time, in which case (b) the effective
date of the Order determining that appeal'.
EXAMPLE:
David and Claire are getting divorced. Claire does not have
a pension; David has a personal pension plan. They instruct
solicitors in March and David asks his pension company for a
valuation. At that time his pension is worth £80,000. David
and Claire decide that a 50:50 split of his pension is fair, so the
Court orders the pension provider to give Claire a Pension Credit
of 50% of David's pension. Claire is therefore expecting to get
about £40,000 to put towards a pension of her own. The Decree
Absolute comes through in July: at that point David's pension has
gone up in value to £82,000, so Claire actually gets
£41,000 as her share. If David's pension had dropped in
value, to say £76,000, Claire would only get £38,000,
as her entitlement can only be to 50% of David's pension.
The Pension Credit is transferable to a pension
arrangement of the ex-spouse's choosing, as long as that pension
arrangement can accept the transfer.
If the ex-spouse makes no choice, the trustees/scheme managers
can choose whether or not to offer the ex-spouse membership of
their scheme. That is, schemes are permitted to insist on a
transfer out (an 'external transfer'), which will typically be to
an insurance contract. However, transfer to a contracted-out scheme
(final salary or career average) of contracted-out Pension Credit
benefits (termed 'safeguarded benefits') requires the consent of
the ex-spouse.
Be aware that transferring from a final salary or career average
scheme to a money purchase scheme (or personal pension plan)
carries a number of risks.
Final salary, career average and money purchase schemes
could not be more different:
- the final salary or career average scheme provides benefits
based on a fixed formula, with reference to a member's completed
service and earnings. For example: Pension = (Service/60) x
final salary.
- the money purchase scheme provides benefits based on the
investment growth of the contributions paid into the scheme and the
rates available at retirement to convert the pot into an
annuity.
It is therefore fair to expect that the benefits available at
retirement will be vastly different. You should seriously
consider taking independent financial advice before accepting an
external transfer so that you understand whether you are getting
value for money.
If a transfer out is not made then the scheme may provide an
'internal transfer', allowing the ex-spouse to become an own right
member of the scheme. The pension credit benefits need not be on
the same basis as those in the scheme. For example, the pension
credit may be on a money purchase basis even though the scheme is
final salary or career average.
Pension credit members are entitled to the normal increases
awarded to members with preserved (frozen) pensions.
Schemes are permitted to charge for dealing with the
administration of pension sharing. Basically the cost involved in
administering pension sharing should not be borne by the scheme,
other members or the taxpayer. The scheme must supply a schedule of
charges to the couple involved on their first enquiry. Any cost not
directly relating to implementing a specific divorce order (e.g.
amending the scheme rules, training administration staff, altering
computer systems etc) will be borne by the scheme. The National
Association of Pension Funds (NAPF) produces a table of recommended
charges to be used as a guide to the industry. This can be found on
the NAPF website.
Further Reading
For impartial information about divorce,
separation and your finances, please visit Moneymadeclear's
Divorce and Separation website by clicking here.
Q & A's
Yes. On the 6th of April 2011 regulations which
detail how PPF compensation is affected for those who get divorced
came into force. Said regulations allow a member's pension
compensation to be shared with their former spouse if a court
issues a pension compensation sharing order. A factsheet on the new
regulations has been issued by the PPF and can be read here: PPF Factsheet
No, that is not possible; the legislation is not
retrospective.
No. It is not possible to assign pension rights except through a
Court Order.
Yes. The trustees must abide by the Court Order.
When the spouse of a member is given a credit in respect of any
pension benefits arising on divorce, this is known as a Pension
Credit.
When a member has to give up part of his/her benefit to a former
spouse, this is known as a Pension Debit.
Yes. So long as you do not remarry and you will be getting less
than the full amount of basic state pension, you can substitute the
record of your former spouse for the period up to when your
marriage ended, or the end of the tax year before you reached state
pension age, whichever comes first. Note that this type of claim
only applies to the Basic State Pension.
It is possible to split rights under the SERPs and State Second
Pension (S2P) schemes in a similar manner to a Pension Sharing
Order. Again the valuation must be obtained at the outset, the same
as for any private rights, as this type of claim cannot be made
retrospectively. In order to obtain the valuation you need to
contact The Pension Service, which is part of the Department for
Works and Pensions (DWP). You can call for a divorce
valuation on 0845 3000 168 or you can complete a paper request
by obtaining and returning form BR20, which is found here: Pension Service Forms
Yes, both options are available. If a pension is shared,
it is necessary for the scheme's actuary to calculate the value of
the pension in payment. The pension is then split in
accordance with the pension sharing order.
That will depend on the terms of the financial settlement.
If you chose to offset your ex-husband's pension against, say,
the house you both owned, and he has got another partner, then you
probably have no rights to information as you will not be a
beneficiary of his pension.
If the Court earmarked some of your ex-husband's pension for you
to get when he retires or dies, then you should be told about any
event that materially affects your earmarked benefit. For example,
the Trustees should tell you if your ex-husband opts out of the
scheme, or, say in the case of a money-purchase scheme, he decides
to reduce his contribution rate. Trustees of a money-purchase
scheme, however, do not have to tell you when the investments fall
in value as it is assumed that this is always a possibility in such
schemes.
If you got a share of your ex-husband's pension at the time of
the divorce, a clean break should have been made. You have your own
pension rights, so you are not entitled to information on your
ex-husband's pension, per se. If you were given an 'internal
transfer', you will have rights in the pension scheme your
ex-husband was in. If the scheme is salary-related, you should
receive a benefit statement if you ask for one; if it is a
money-purchase scheme, you should receive annual statements of the
value of your fund.
Your right to a pension (under the earmarking arrangement)
should transfer over to the new scheme - but the new scheme
Trustees will rely on the current scheme Trustees telling them
about your rights.
Technically, yes, as Stakeholders can be shared like other
private pension arrangements. However, the Court's aim will be to
share your assets fairly between you. Your pension will be taken
into account, but if your husband owns the bulk of the assets - and
his company pension is likely to be a large asset - then your
Stakeholder pension should be unaffected.
