Divorce is a complex time, and dividing assets can be particularly challenging. Among these assets, pensions often represent a significant portion of a couple’s wealth. This is where a Pension Sharing Order (PSO) comes in.
At The Divorce IFA, we help individuals navigate these intricate financial waters, ensuring a fair and clear financial future.
What is a Pension Sharing Order?
A Pension Sharing Order is a legal tool used in the UK. It allows pension assets to be divided between divorcing spouses. The aim is to create a “clean financial break” between the parties. This means that once the pension is split, there are no ongoing financial ties related to that pension.
Who is a Pension Sharing Order For?
PSOs are for divorcing couples in the UK who need to divide their pension wealth. It can apply to most private pensions. This includes both ‘defined benefit’ pensions (which pay a set income in retirement) and ‘defined contribution’ pensions (which are like a pot of money that grows).
It’s important to know that State Pensions cannot be shared using a PSO.
How is a Pension Sharing Order Calculated?
The calculation of a PSO is a precise process. It is guided by family law and specific pension rules.
It’s a Percentage, Not a Fixed Amount: The court decides what proportion of the pension will go to the non-member spouse. This is expressed as a percentage. For example, the court might order a 40% share of a pension. This percentage applies to the pension’s transfer value.
The Valuation Day is Key: The value of the pension for the final pension sharing is calculated based on the benefits that existed immediately prior to the day before the PSO officially comes into effect (known as the Transfer Day). This value known as the Cash Equivalent Value (CEV) or Cash Equivalent Transfer Value (CETV is provided by the pension scheme administrators. The CETVs may be calculated a various points throughout your divorce. Firstly, after all financial details have been disclosed and this will be used for the negotiations and then importantly, when the final agreement is made and the implementation period starts, the CETV is recalculated, and the scheme has 4 months to choose the Valuation Day. This is the date when the CETV is recalculated for the final time and becomes the figure which the pension share is actually made against. It can be higher or lower than the original CETV used in the negotiations and this can have consequences to outcomes.
What’s Included in the Share? In England and Wales, the entire value of a pension can be considered for sharing. In Scotland, however, only the pension that was built up during the marriage can be shared.
Example of a Calculation: Let’s say a pension pot is valued at £200,000. If the court orders a 40% share, then £80,000 will be transferred to the ex-spouse. This £80,000 is called a “pension credit.”
How Does a Pension Sharing Order Work in Practice?
Once the court issues a PSO, the process moves to implementation.
The Transfer Process: The original pension member’s pension is reduced by the specified percentage. The ex-spouse then receives a “pension credit” of the same value. The ex-spouse then has options. They can usually transfer this pension credit into a new pension plan in their own name. In some cases, they might be able to keep it within the original pension scheme as a “shadow membership.”
Timing and Administration: Pension providers have a legal timeframe to act on the order. They must implement the PSO within four months. This timeframe begins once they have all the necessary information and any applicable charges have been paid. It’s common for pension providers to charge fees for both the valuation and the administration of the PSO. These fees must be clearly disclosed upfront.
Impact on Benefits: For defined benefit pensions, the way the ex-spouse’s pension credit is calculated might be different from how the member’s benefits are reduced. This is due to different actuarial factors. Also, when the recipient can start taking their pension benefits might be different from when the original member can.
Multiple Pensions: It is possible to apply PSOs to more than one pension scheme for a single person. However, only one PSO (or an earmarking order) can apply to a specific pension scheme for the same divorce.
Why a Good Financial Advisor is Essential
Navigating Pension Sharing Orders can be incredibly complex. This is where a specialist divorce financial advisor becomes invaluable.
Ensuring Full Disclosure: A good advisor will make sure that all pensions are properly identified and valued. This includes workplace pensions, personal pensions, and public sector pensions. Overlooking a pension can lead to an unfair settlement.
Understanding Complexities with Actuaries: Some pension cases are very complicated. This is especially true for defined benefit schemes or when there are big differences in how long each person built up their pension. In these situations, an actuary (a financial expert) might be needed. They can provide reports to show different ways to split the pension and ensure fairness. A good financial advisor knows when this is necessary and can arrange it.
Tax Implications: Pension shares count towards the recipient’s own pension Lifetime Allowance. If the pension being shared is very large, there could be tax implications for the recipient. Your advisor will explain these to ensure you’re aware of any potential tax consequences.
Pension vs. Cash: It’s important to remember that PSOs share pension assets as a pension, not as a lump sum of cash. There is a rare exception where the recipient is old enough to take pension withdrawals, and the scheme rules allow it. Your advisor will clarify this.
Achieving a Clean Break: One of the biggest benefits of a PSO is that it provides a clean break. This means that after the pension is shared, neither party’s future financial situation (like remarriage or death) will affect the other’s entitlement to their share of the pension.
Understanding Fees: Both the pension scheme member and the non-member can be responsible for administration, court, or valuation fees. Your financial advisor will help ensure these are clearly understood and agreed upon or directed by the court.
How Can We Help?
A Pension Sharing Order is a powerful tool for achieving financial fairness and independence after divorce in the UK. Its calculation and implementation are precise and legally binding. Due to the complexities involved, especially with different pension types and tax rules, getting expert advice from a qualified divorce financial advisor is crucial.
Here at Divorce IFA, Phil is one of the few Chartered Financial Planners and Certified Financial Planners in the UK, as well as a Resolution Accredited Independent Financial Adviser. He has both the expertise and experience providing financial planning and advice to a range of clients, from directors of FTSE 100 companies, private company directors, and senior medical practitioners. He has advised on the financial aspects of divorce, particularly pension sharing.
We want to help you navigate the process, ensure all assets are properly valued, and work towards a settlement that secures your financial future. Get in touch today and let us be a part of your financial planning.