As opposed to a pension transfer, through which you can combine pension assets, a pension sharing order is a way of pension splitting for divorce. Untangling your finances after a divorce can get complicated, especially when shared pensions are involved. That’s where pension sharing on divorce comes in.
| What is a pension sharing order? | A pension sharing order is a request to split pension assets once you have filed for divorce or dissolution of a civil partnership |
| What is a CETV? | CETV stands for cash equivalent transfer value, which is the value attributed to the pension benefits to be received. |
| How long does it take to finalise the pension sharing arrangement? | The pension provider must begin executing the PSO within four months of having received the requested documentation |
What is a pension sharing order, and how do I apply for one?
If you’ve filed for divorce or to dissolve a civil partnership, one of the options that you can apply for to split up pension assets fairly is a pension sharing order. You request or apply for a pension sharing from the court handling your divorce or dissolution, which will issue the order when divvying up the assets, sending all the necessary information to the pension fund provider to implement the order over a reasonable amount of time.
How does pension sharing order work?
Suppose you decide to file for a pension sharing order. In that case, the divorcing parties’ solicitors will determine the value of the pension and establish a fair division of the assets, consulting pension experts where necessary. The court handling the divorce proceedings will then issue a pension sharing order (PSO) according to the terms established and agreed upon by the two parties. This will be sent to the pension fund provider for implementation in a reasonable timeframe. If there is no court order for divorce or dissolution, then a pension cannot be divided between spouses.
The total amount to be received by the parties is called the transfer value, or CETV. The PSO establishes the designated percentage of the transfer value that each party is entitled to receive, usually expressed as a percentage. This value is established the day before the PSO goes into effect.
Please note that pension sharing is available for all pension options. For instance, it does not work for most State pensions. The only exception is on additional state pension via a court order, and the new state pension-protected payment. Depending on the type of pension arrangement, an additional state pension can only be shared if the entitled individual reached the state pension age before 6th April 2016, and if the divorce application was put into the system before 6th April 2016. The protected payment element is for individuals that accumulated a high amount of additional state pension before they reached the state pension age on or after 6th April 2016.
Please note that laws and processes of implementing a pension sharing order are for pension schemes within England and Wales.
What is a CETV?
CETV stands for cash equivalent transfer value, which is the value attributed to the pension benefits to be received. The pension credit owed from the pension divorce settlement is usually expressed as a percentage of the CETV, since the total value of the CETV may vary over time, depending on the type of pension scheme, since a self employed pension will accrued value differently than other savings mechanisms like Stocks and Shares ISAs. In order to issue a PSO, it is first necessary to calculate the CETV. This is more complicated than it may seem, for which the solicitors in divorce proceedings may refer to experts to make sure the CETV is calculated correctly.
Pension sharing order: can I take a lump sum?
Suppose the pension sharing order was processed on or after 31 March 2014, and your ex-spouse or ex-partner’s pension was paying into a local government pension scheme (LGPS) on or after 31 March 2014. In that case, you are entitled to the pension credit once you reach the normal pension age, which is linked to the state pension age. You can also take out the pension credit from age 55, but you will receive a smaller amount for early withdrawal. Also, you can take out part of the pension as a lump sum. However, if your former spouse or civil partner has already retired or received some of their pension as a lump sum before the pension sharing order took effect, then you cannot take out a lump sum pension.
Suppose the pension sharing order was processed before 1 April 2014, and your ex-spouse or ex-partner’s pension stopped paying into an LGPS before 1 April 2014. In that case, you are entitled to the pension credit from the normal pension age of 65. You can also take out the pension credit from age 55, but you will receive a smaller amount for early withdrawal. However, you can’t take out part of the pension credit as a lump sum. The only exception is if you are terminally ill (you will receive a lump sum equal to five years pension) or if your former spouse or partner had not taken out a lump sum pension payment and stopped paying into the LGPS before 1 April 2008.
The date you can claim your pension credit is not linked to when your ex-spouse or ex-partner becomes a pensioner member and takes out their pension. However, it is dependent on the date of the pension sharing order and if your ex-spouse or ex-partner was an active member of the LGPS in April 2014. When you are receiving money as pension credit from a pension sharing order, you are entitled to a tax free lump sum before the remaining pension is subject to income tax.
How long does it take to finalise the pension sharing arrangement?
Once the parties have come to an agreement on the PSO, the court will finalise the PSO by sending the documentation to the pension provider. The provider must begin executing the PSO within four months of having received the documentation. However, it may be much more than four months from when the proceedings begin to when the pension credits are provided.
Also, delays in executing the PSO can occur due to delays on the part of your ex-spouse’s solicitors in providing the pension provider with the necessary information. Once the process is finalised, each party is informed within 12 days.
When is pension sharing a good idea?
Pension sharing provides for a “clean break” in the divorce settlement, as well as a fair division of the couple’s assets. Pension sharing might make sense for you if you are looking for a clean break that is more or less immediate. Note, however, that once the order has been filed and the pension transfer value has been calculated, the pension sharing order cannot be changed.
Suppose the value of the pension is particularly high compared to the other assets to be divided. In that case, applying for a pension sharing order may also be a good idea, especially if you’re close to retirement age and have difficulty building up a similar amount of pension benefits in a short amount of time. While it’s never too late to learn how to make investments in the UK on your own if you are in your 50s and don’t have another form of retirement income set up for yourself, filing for a PSO may be a good way to supplement your 50s retirement savings. Under the current pension sharing regimen, in the UK you are eligible to start receiving pension credit at the age of 50, before the pension age.
Pension sharing might not be the best option for you if you’ve already amassed a sizable pension or you aren’t willing to share other assets as well.
Pros and cons of pension sharing
If you are trying to decide if a pension sharing order might make sense for you in your divorce, here are some points to keep in mind as you make your decision:
Pros
- PSOs provide for a “clean break” that is more or less immediate
- Pension sharing provides for pension credits for both parties in retirement
- Pension credits provided through PSO aren’t affected by remarriage or death or the ex-spouse
Cons
- Pension providers usually charge a fee for pension sharing
- Future income of one party will be reduced
- PSO’s may affect the lifetime allowance of the recipient
What happens if there is a mistake in the pension sharing process?
If you suspect that something has gone wrong in executing the pension sharing order, because you’ve either received an under-allocation or over-allocation of pension credit, you should verify first with the pension provider to ensure that the right amount has been provided. If the pension provider has made a mistake, they are legally obliged to rectify the situation.
If you suspect that there has been a misrepresentation of the pension assets to be divided, you may need to refer to your solicitor. If you feel that your solicitor has not adequately represented your rights in the pension sharing arrangement, or they made a mistake, you may have grounds to take them to court for negligence.
Negligence in divorces
Pension sharing has been around for more than twenty years. Yet, it is not uncommon for a pension settlement to be drawn up according to an inaccurate value of the pension. If you feel that in the divorce proceedings, your legal representative did not provide full or accurate guidance on pension sharing orders or did not receive the expert advice necessary to advocate for a fair division of the couple’s assets, you may have a claim for negligence. To make your case, you should seek out additional professional help.
What about pensions that are already paying out?
While the process is a bit more complicated, and the fees for enacting a PSO may be higher, it’s possible to file for pension sharing from funds where pension benefits are already being received. You can check the pension sharing order costs with the individual pension provider.
How does pension sharing impact my Lifetime Allowance?
Any pension credits you receive from a pension sharing order will contribute to the total amount of tax free savings benefits that you receive as part of the Lifetime allowance. Those who are receiving a PSO credit need to be careful that the benefit does not push them over the limit.
FAQ
What are the advantages of pension sharing?
PSOs provide for a relatively easy split of assets that is more or less immediate, providing for pension credits to both parties in retirement.
What are the drawbacks of PSOs?
The downside of PSOs is that pension providers usually charge a fee for pension sharing, and the future income of one party will be reduced.
How do I know if I have grounds to file for negligence in the proceedings?
If you find that the PSO settlement has been drawn up according to an inaccurate portrayal of pension assets, you can make a claim for negligence.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
