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Pension sharing – overview

Pension sharing was introduced by the Welfare Reform and Pensions Act 1999, to give a ‘clean break’ option for dealing with pension rights on divorce or dissolution of a civil partnership.

It's available where the petition for divorce or dissolution was served after 30 November 2000. But it's not available for cohabitees or for couples who are seeking a legal separation rather than a divorce or dissolution.

Under pension sharing, pension rights are divided at the time of the divorce or dissolution. When a pension sharing order is made, part of the member's pension rights is awarded to the former spouse or civil partner of the member as a 'pension credit'. This provides the former spouse or civil partner with pension benefits in their own right, independent of the member's benefits. A corresponding 'pension debit' is recorded against the member's benefits.

If the member has more than one pension scheme, it's not necessary for benefits under all the schemes to be shared. A sharing order can be made against just one, or some, of the schemes to provide for the former spouse or civil partner.

If a sharing order is made against a scheme that contains both contracted-out and excess rights, the former spouse or civil partner must be given a proportionate share of each type of benefit. For example, if a sharing order specifies a 70% benefit share, the pension credit must be made up of 70% of the contracted-out element and 70% of the excess element.

If the divorce occurs in Scotland, a share of pension funds can be achieved either through a pension sharing order or a 'qualifying agreement'. This latter method is a written agreement between the parties which:

• has a schedule of information on the parties and the pension
• shows that the scheme has been informed in advance and
• is registered in the Books of Council and Session

Pension sharing – excluded pension rights

Most types of pension can be shared on divorce. However the following are exceptions:

• Basic State Pension
• New State Pension - although, any 'protected payment' paid in addition to the New State Pension can be shared
• State Graduated Pension
• any spouse's or civil partner's pension being paid to the member in respect of the death of a spouse or civil partner from a previous marriage or civil partnership. In Scotland, only wealth inherited during marriage or civil partnership is classed as matrimonial property, so pre-marriage beneficiary's drawdown isn't shareable on divorce. In England and Wales, the Court's approach is generally not to share property acquired by gift or inheritance, unless it's required to meet financial needs. So, unless hardship is involved, inherited pensions are unlikely to be shared on divorce
• an excepted public service pension scheme - that is, one which is specified as such by order of a minister or government department responsible for the scheme
• a scheme which is already subject to an earmarking order
  
• an overseas pension (this was established by case law - Goyal v Goyal (2016))

It's also not possible to have multiple sharing orders on the same pension arrangement in respect of the same two individuals. But it is possible to have more than one pension sharing order on the same pension arrangement in respect of different marriages.

Additional State Pension (SERPS or S2P) entitlement can be shared, by an internal transfer. However, they would normally only be shared as a last resort if the divorcing couple are unable to achieve an equitable result within their non-State Pension benefits.

As of 6 April 2011, rights under the Pension Protection Fund (PPF) can be shared. But an external transfer is not an option, so the former spouse or civil partner would have to become a shadow member.

Pension sharing – advantages and disadvantages

Pension sharing has several perceived advantages and disadvantages.

The main perceived advantages of pension sharing on divorce are:

• it provides a clean break between the parties
• each party has independent pension benefits in their own right, under their control
• the member whose pension benefits are subject to a sharing order will be able to keep more of the non-pension assets
• neither party's rights are affected by the other's subsequent death or remarriage

The main perceived disadvantages of pension sharing on divorce are:

• the loss of death benefits for the former spouse or civil partner of the member
• the member may not be able to replace the lost pension fund
• the member can, in some circumstances, lose primary or individual protection as a result of pension sharing
• in return for the pension share, the former spouse or civil partner of the member will receive less of the couple's non-pension assets. This could leave them with financial difficulties if they're below pension age and, therefore, unable to access the pension credit rights

Pension sharing – valuing the pension rights

In general, to establish a cash value for the purpose of agreeing a divorce settlement, pension rights are valued in line with the cash equivalent transfer value requirements.

In Scotland, the transfer value is pro-rated to reflect that only assets built up during the marriage or civil partnership are taken into account on divorce or dissolution.

In England and Wales, all assets have to be considered, not just those acquired during the marriage or civil partnership.

For pension sharing there are two valuations involved - one for information purposes to agree the settlement and another for implementation purposes when the sharing order goes ahead. Essentially these use the same calculation method, but at different dates.

Information valuation

This is the figure used by the Court and the parties to decide how to share the benefits in question.

• Under English law, the calculation should be made as at the date the request was received. Alternatively, if the Court has served an order requiring a valuation to be provided, it can specify the relevant date to be used for the valuation.
• Under Scots law, the relevant date is the earlier of (a) the date on which the parties ceased to cohabit or (b) the date of service of the summons in the action for divorce. In most cases, the separation date is used as the relevant date for both the termination of pensionable service for active members and the effective date of the calculation. This information can be provided to the Courts and the member.

Under both English and Scots law, the valuation must be provided within three months of the request.

Implementation valuation

The implementation valuation is the figure used to calculate the former spouse or civil partner's pension credit and the corresponding pension debit for the member.

It's calculated at any date chosen by the scheme administrator in the four month implementation period.

However, a key practical difference in Scotland is that the rights to be shared can be specified as a fixed monetary amount as an alternative to specifying a percentage of the benefit value. Where a monetary amount is specified, this is subject to a maximum of the cash equivalent transfer value.

Pension sharing – options for providing the pension credit

There are two ways rights can be secured to provide benefits for the recipient of a pension credit:

• making an external transfer to another pension scheme for the recipient, or
• offering shadow membership and providing benefits for the recipient within the original member's pension scheme (also known as an internal transfer)

Availability of the options

The rules of any pension scheme must set out what options they'll make available in the event of a pension sharing order being made against their scheme benefits.

• Funded pension schemes legally only have to offer an external transfer, as long as a full transfer value is available to the recipient of the pension credit. But if only a reduced transfer value can be paid (for example, in the case of an underfunded defined benefit scheme), the recipient must be offered shadow membership and told when a full transfer value is likely to be available.
• Funded pension schemes can choose to offer shadow membership but, owing to the complexity involved, it's unlikely that many schemes will offer this option. It's only likely to be made available under:
  
  
  • underfunded defined benefit schemes (where the trustees don't want to pay a full transfer value), or
  • SSASs (where the trustees may be reluctant to realise investments such as property or loans to finance a transfer value).
• Unfunded defined benefit schemes (predominantly public service schemes) only have to offer shadow membership. This means they don't have to pay out transfer values where there's no fund to pay them from.
• Sharing of rights under the earnings-related portion of the State Pension scheme (SERPS or S2P) can only be done using shadow membership.
• Similarly, the PPF only allows shadow membership.

The person receiving the pension credit should be encouraged to make an active choice about where they'd like their pension credit rights secured. In fact, in many cases, the terms of the court settlement will require the recipient to decide. But if they refuse to cooperate, the pension scheme trustees can discharge their pension credit liability by either:

• making an external transfer to a buy-out contract of their choice, or
• providing shadow membership of their scheme

Finally, in practice, some pension trustees won't accept pension credit transfers and many pension providers will only allow them to be transferred into a restricted range of products.

Pension credit – benefit options

In general, the usual benefit rules and options relating to pension age, lump sums, pension shape and type apply to the recipient's pension credit rights.

But, as with any pension, these will depend on the rules and benefit flexibility available under the pension scheme concerned. Particularly under occupational pension schemes, this might limit when benefits can be taken and the type of benefits available.

Special rules apply to 'disqualifying pension credits' - these are any part of the pension credit that came from a pension already in payment.

• No tax-free cash is allowed from a disqualifying pension credit
• There's no option to take funds which represent a disqualifying pension credit as an uncrystallised funds pension lump sum (UFPLS)
• If an arrangement that is entirely made up of a disqualifying pension credit is put into flexi-access drawdown and income is taken, it doesn't trigger the money purchase annual allowance
• The recipient of a disqualifying pension credit can apply for an enhancement to their 'lump sum and death benefit allowance' (LSDBA). The enhancement will apply to any relevant benefit crystallisation events except the payment of pension commencement lump sums (PCLS) or uncrystallised funds pension lump sums (UFPLS) 

Pension sharing – implementation

Charges

Schemes can charge for implementing a pension sharing order, but only if details of their intention to do so, and the charges payable, were clearly set out in the schedule of charges issued at the initial information stage of the pension sharing process.

The notice of implementation should specify whether charges can be paid separately or will be recovered from the member's fund and/or the pension credit. 

If the pension sharing order doesn't state how the charges are to be apportioned between the divorcing parties, then the full charge will be attributed to the scheme member.

Pension sharing – implementation time limits

Once a pension sharing order has been received by a scheme, it normally has four months to implement it (known as the implementation period). The implementation period begins on the later of:

• receipt of the pension sharing order
• the effective date of the pension sharing order
• receipt of the relevant matrimonial documents
• receipt of information required pre-implementation

In Scotland only, the above items must normally be provided within two months of the date of the divorce decree, otherwise the pension sharing order/provision is deemed never to have taken effect. However, on application by any interested party, this period can be extended by order of the Sheriff or the Court of Session.

The trustees of an occupational scheme can apply to the Pensions Regulator to extend the implementation period. However, they will only grant an extension in the following circumstances:

• the scheme is being wound up or is about to be wound up
• the financial interests of the members of the scheme generally will be prejudiced if the trustees or managers do what is needed to discharge their liability for the pension credit within that period
• the trustees or managers have not been provided with all the necessary information to allow them to discharge their liability within the implementation period
• the transferor or the transferee has disputed the amount of the cash equivalent transfer value and the dispute has not been resolved

The application must be made to The Pensions Regulator before the end of the initial implementation period.

Notice of implementation requirements

Within 21 days of the start of the implementation period, the scheme trustees or administrator must issue one of the following to both the member and their former spouse or civil partner:

• a notice of implementation specifying the date on which the implementation period begins, or
• a notice stating that the implementation period will be postponed pending the payment of previously notified charges, or
• details of any previously requested information needed to implement the order which remains outstanding, or
• a statement detailing why the order can't be implemented

Implementation confirmation

Once a pension sharing order has been implemented, the scheme trustees or administrator have to notify the member and their former spouse or civil partner within 21 days, giving details including:

• the date on which the pension sharing order was implemented (i.e. the transfer day)
• the amount of the pension credit/ debit
• how any charges will be recovered

Penalties for late implementation

If scheme trustees or administrators don't implement a pension sharing order within the required timescale, they can be fined by the Pensions Regulator up to a maximum of:

• £1,000 in the case of an individual or
• £10,000 in any other case

Death of ex-partner before implementation

Where the member's former spouse or civil partner dies before the pension sharing order has been implemented:

• if the scheme rules permit, the scheme may pay lump sum death benefits and/or survivors' pensions to one or more of the former spouse's or civil partner's beneficiaries
• if the pension credit rights are not used (or not fully used) in this way, the liability is still deemed to be fully discharged. The remaining pension credit rights are treated as a surplus under normal rules

Pension sharing and the annual allowance

Whether, and how, receipt of a pension credit from pension sharing impacts on the recipient’s annual allowance depends on the type of scheme it comes from.

• If a registered pension scheme receives a pension credit from another registered pension scheme, it's not classed as a contribution so can be ignored for annual allowance purposes.
  
  If the pension credit is received under a defined benefit scheme, the value of the individual's rights under the scheme at the end of the pension input period during which the pension credit is received (known as the closing value) will be adjusted to ensure the correct pension input amount is used for the purposes of testing against the annual allowance.
• However, a pension credit received by a registered pension scheme is classed as a contribution and will count towards the annual allowance if it comes from a non-registered pension scheme. The individual receiving the pension credit can claim tax relief on the contribution, up to the normal limit for an individual.