Pension Sharing on Divorce Made Simple
Matrimonial Solicitors are frequently asked what Pension Sharing is, when is it applicable, what are the benefits and what information is required in order to consider pension sharing. This is a notoriously difficult area of law where frequently professional advice is necessary from an Independent Financial Advisor who will work in conjunction with your Matrimonial Solicitor. This article aims however to provide the main points which separating couples need to be aware of.
What is Pension Sharing?
Pension Sharing is when a percentage share of one party’s pension or pensions are transferred into a pension scheme in the name of and for the sole benefit of the party’s spouse or civil partner.
Most pension shares are external transfers which means that the recipient of the pension share is responsible for setting up a new scheme or transferring the pension credit to an existing scheme. It is possible that some schemes will allow an internal pension share which means that the pension credit for the recipient spouse remains in the same pension scheme but the pension is in the recipient’s sole name and for their sole benefit and subject to the same rules of that scheme. An internal transfer is available in limited circumstances generally defined benefit schemes (see below) and in those schemes it is generally compulsory, you do not have the option of an external transfer. An example would be a number of government superannuation schemes.
When is Pension Sharing available?
Pension Sharing is available on divorce or upon the dissolution of a civil partnership.
It is not available where parties are not married or in a civil partnership. For example, it is not available to cohabiting couples or couples who are separated.
What are the benefits of Pension Sharing?
Before Pension Sharing was introduced, if a party to a marriage was to receive a share of their ex-spouse’s pension, it could only be ear-marked which would mean that it could only be realised when the spouse that was the pension member reached their retirement and claimed their pension benefits. One of the major disadvantages of ‘ear-marking’ (an option which is still available) was that if the pension member should die, then all benefits would die with them so the surviving ex-spouse would not receive any benefit. He or she would not be a widow either, so would not be entitled to any widow’s benefit.
Pension Sharing enabled the Court to make an Order so that the recipient spouse’s pension benefits were in their sole name for their sole benefit. This in turn enabled a clean break to be possible which means that in a divorce or civil partnership, each spouse or civil partner would have their own pension scheme, independent of the other, which had the added advantage of enabling them to nominate their own beneficiaries to their schemes which now can include dependent children or adult children.
What information is necessary to consider a Pension Sharing Order?
There are a number of ways to value a pension scheme. The information which is often provided to pension members is an actuarial forecast of what benefits will be realised at retirement age.
For the purpose of considering Pension Sharing, your Solicitors will require a CETV (‘Current Equivalent Transfer Value’) in respect of each of your schemes to advise on Pension Sharing. This is the valuation that is utilised by the Court when considering whether Pension Sharing is appropriate and the details of a Pension Sharing Order.
As a number of pension schemes can take some time to provide CETV’s, it is important that they are requested at the earliest possible opportunity particularly in the case of defined benefit schemes when generally CETV’s take longer to calculate.
Other frequently asked questions
Costs of Pension Sharing
One point that must be considered in relation to any Pension Sharing Order is the costs of Pension Sharing.
The pension scheme that transfers a pension credit either internally or externally usually charges an administration fee. This fee varies considerably between schemes and it is important that this fee is clarified before a Pension Sharing Order is made and that provision is made for how this fee is to be paid.
Provision may be made for the fees to be shared or for the fees to be paid from the pension fund. It may also be possible for any pension credit to make provision for the fees that will be paid by the recipient of the pension credit to an Independent Financial Advisor to set up a scheme to receive the pension credit.
In some cases, an actuarial report will be required to assist Solicitors in ensuring there is clarity as to the advice given in relation to Pension Sharing which does incur additional fees but is important to ensure a clear understanding by all parties. This may be particularly important in the case of defined benefit schemes.
Difference between a Money Purchase Scheme and Defined Benefits Scheme
A Money Purchase Scheme is where the pension benefit that is available at retirement is determined by the amount of contributions paid into the fund and the underlying investment on these contributions by the pension member and possibly the pension member’s employer. Such schemes are often referred to as Defined Contribution Schemes.
Such schemes have become more commonplace in recent years as many employers have moved to this structure and provided workplace pensions to reduce their pension liabilities. Such schemes are however more flexible than Defined Benefit Schemes particularly when claiming benefits at retirement. For example, benefits can be claimed from age 55 and assets can be passed down to beneficiaries upon death after retirement, not simply to their spouse which had been the position previously.
A Defined Benefit Scheme is where a pension arrangement upon retirement provides specific benefits to its members from an Occupational Pension Scheme that is based upon salary and service. These are frequently referred to as Final Salary, Salary Related or Career Average Schemes.
Such schemes do not have the flexibility of defined contribution or Money Purchase Schemes, they are only realisable within certain rigid scheme rules.
The main benefit of such schemes is certainty of income upon retirement.
This article outlines Pension Sharing and some of the terminology used when considering Pension Sharing Orders. It is a notoriously complex area and you should seek advice. Our Matrimonial Solicitors are highly experienced and will assist with the instruction of an Independent Financial Advisor if required.
Carter Bells work with a number of recognised Independent Financial Advisors experienced in this area of work.