How divorce affects pensions: Pension sharing

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This series has so far given an overview of how divorce affects pensions and explained how offsetting and earmarking work. This entry examines pension sharing.

Pension sharing is when the scheme member divides his or her pension with the ex-spouse, and is available in divorces petitioned for after December 1st 2000. It is available for both defined contribution and defined benefit pensions - with the former, sharing will be a percentage of the fund, and in the latter will be expressed as benefits to be received.

The share will not always be 50% to each party though, and the ex-spouse may be entitled to membership of the scheme and/or a transfer value. Pension sharing does not apply to the basic state pension, state graduated pension, or a widow(er)'s pension in payment, but the following can be shared:

  • State Earnings Related Pension Scheme (SERPS) and the State Second Pension (S2P)
  • Occupational schemes, including Additional Voluntary Contributions (AVCs)
  • Registered individual schemes, such as section 32s, personal pensions, stakeholder pensions and retirement annuity contracts
  • Unapproved schemes such as Employer-Financed Retirement Benefit Schemes (EFRBS)
  • Statutory schemes

How a share is calculated depends on whether the pension is defined contribution or defined benefits and whether it is funded or unfunded.

Defined contribution scheme

Defined contribution schemes are funded, which makes sharing simple. The courts will simply allocate a percentage to the ex-spouse - if 30% of a £100,000 fund is allocated then the ex-spouse will receive £30,000. This money can be transferred to their occupational or personal pension, in which case the benefits will be under the rules of the new scheme; or the original scheme offers membership to the ex-spouse, in which case the allocated percentage remains in the member's scheme but still belongs to the ex-spouse.

Funded defined benefit scheme

With funded defined benefit schemes, where the retirement money is already allocated, the rules are largely the same as for a defined contribution scheme, but the percentage to be awarded is based on the cash equivalent transfer value (CETV) on the date of the pension sharing order. It is also possible for a defined benefit scheme to charge a penalty if benefits are taken before the typical minimum pension age, and it may also increase the age band for retirement if benefits are retained in the scheme.

Although the transfer value must be offered to the ex-spouse, there is no requirement to offer membership of the scheme to the ex-spouse.

Unfunded defined benefit scheme

Unfunded schemes, which include public sector schemes, are trickier to share because there is no fund - the benefits are paid from current contributions by other members. As such, there is no requirement to provide a transfer value, because it could negatively affect the scheme; instead, the ex-spouse must be offered membership in the scheme.

 There are also pension credits and debits in pension sharing. The benefits the ex-spouse receives are called pension credits, and the value deducted from the member is a pension debit. In a defined contribution scheme both are stated as a percentage of the fund, but in a defined benefit scheme they may be expressed in years. As an example, if an ex-spouse is awarded 30% of 20 years in a defined benefit scheme they will be given a credit of six years' service.

If a pension sharing order was given on or after A-Day then the credits will be counted towards the lifetime allowance, unless the credit comes from an existing pension in payment. Pension debits on or after A-Day do not usually count towards the lifetime allowance, but if the member applied for primary protection then their pension rights value will need recalculating and the member will then receive a new lifetime allowance.

Pension sharing has some notable advantages, one of which is that neither death nor re-marriage of either party affects the order.

Have you had experience with pension sharing, offsetting or earmarking? Let us know on Twitter or Facebook.

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