Pension sharing orders in divorce explained

When people are looking to divide their pensions as part of their divorce, a Pension Sharing Order is the most common approach, as it is often considered the fairest way to deal with pensions, creating a clean break and giving each person their own pension to control independently.

However, pension sharing can feel complicated, and the process involves several steps that need to be handled correctly.

This article explains exactly what a Pension Sharing Order is, how it works, when it's the right choice, and what the process involves from start to finish.

What is a Pension Sharing Order?

A Pension Sharing Order is a court order that transfers a percentage of one person's pension to another. The amount transferred is then the receiving person's own pension, and is entirely separate from their ex-spouse.

The order specifies a percentage of the pension rather than a fixed amount. When the order is implemented, the percentage is then applied to the pension's Cash Equivalent Transfer Value (CETV).

For example, if the court states that 40% of your spouse's pension should be shared, and the CETV is £200,000 at the time of implementation, you would receive £80,000, which would be transferred into a pension in your name.

How Pension Sharing Orders work

The mechanics of pension sharing are straightforward in principle, though implementation can be complex.

Once you and your spouse have agreed on a financial settlement (or the court has decided one for you), the court makes a Consent Order or Final Order setting out all the financial arrangements. This includes the Pension Sharing Order, which specifies which pension or pensions are to be shared and the percentage to be transferred.

The amount transferred goes into a pension in the receiving person's name. What happens next depends on the type of pension and the pension scheme's rules.

For defined contribution pensions, the transferred amount usually goes into a new defined contribution pension in the receiving person's name. Some schemes allow an "internal transfer" where the receiving person becomes a member of the same pension scheme. Other schemes require an "external transfer," in which the money is moved to a different pension scheme of the receiving person's choice.

For defined benefit pensions, the situation is more complex. Most defined benefit schemes do not allow a person to become a member and receive their own defined benefit pension. Instead, the transferred amount is usually converted into a defined contribution pension.

This means you receive a lump sum rather than a guaranteed income, which is one of the disadvantages of a defined benefit pension.

Once the transfer is complete, the original pension holder's benefits are reduced accordingly.

Once a Pension Sharing Order has been implemented, it cannot be changed or reversed. This is different from other financial orders in divorce, such as spousal maintenance, which can be varied if circumstances change, which is why it's so important to get it right the first time.

Advantages of Pension Sharing Orders

Pension Sharing Orders are popular for good reasons. They offer several important advantages.

The most significant advantage is that it creates a clean break. Once the pension has been shared, each person has their own pension, and there's no ongoing financial connection between the former spouses. You don't need to coordinate with your ex-spouse about when to retire. You don't need to inform them of your address. You don't need to worry about what happens if they die or remarry. Your pension is yours, completely and independently.

For many people going through divorce, achieving a clean break is extremely important. It allows both parties to move forward with their lives without ongoing financial entanglement.

When you receive a pension share, it becomes your pension. You control it. You decide how it's invested (if it's a defined contribution pension). You decide when to retire and when to start drawing it (subject to the pension scheme's rules on the minimum retirement age). You make the decisions about your own financial future.

Because the pension is now in your name, you don't lose it if your ex-spouse dies. This is a crucial protection. With other methods of dealing with pensions in divorce (particularly pension attachment), you can lose everything if your ex-spouse dies before or after retirement. With pension sharing, the pension is yours regardless of what happens to your ex-spouse.

You and your ex-spouse might be different ages. You might want to retire at different times. With pension sharing, this doesn't matter. Each person can access their own pension when they choose to retire (subject to the normal rules about minimum pension age). You're not dependent on your ex-spouse's retirement decisions.

Particularly in longer marriages, pension sharing is often seen as the fairest way to divide pension assets. It recognises that marriage is a partnership in which both parties contribute, whether through paid employment or by running the home and caring for children. Both parties have helped build the pension assets, and both should benefit from them.

Disadvantages of Pension Sharing Orders

While pension sharing has many advantages, it also has disadvantages and limitations you need to understand.

Pension sharing isn't as simple as transferring money from one bank account to another. There is a lot of work involved in getting pension valuations, preparing court documents, getting court approval, and then working with pension providers to implement the transfer. Each takes time and requires attention to detail.

For complex pensions or when multiple pensions are to be shared, the process can become quite involved. You may need expert advice from a Pension on Divorce Expert to ensure everything is done correctly.

Pension sharing isn't free. You'll have legal costs for both parties (though how these are divided is negotiable). Additionally, the pension provider may charge an implementation fee for carrying out the pension share. These fees vary but can be several hundred pounds per pension.

Your Consent Order should specify who pays these implementation fees. Often, the costs are shared or paid by the person whose pension is being shared, but this needs to be agreed as part of your overall settlement.

This is rare with modern pension schemes, but some older pension schemes, particularly very old defined benefit schemes, may not have the facility to accept pension sharing orders. If you encounter this situation, you'll need to consider alternative approaches such as pension offsetting.

For defined contribution pensions, once you receive your share, you bear the investment risk. If the investments in your pension perform badly, the value of your pension pot may fall. The person who originally held the pension is no longer bearing this risk for the portion you've received – you are.

This is something to consider when deciding how to invest your pension after receiving a share. You may want to seek financial advice on how to invest your pension to meet your retirement needs.

This is a significant disadvantage when sharing defined benefit pensions. As mentioned earlier, most defined benefit schemes won't allow a person to become a member and receive their own defined benefit pension. Instead, the cash value is transferred into a defined contribution pension.

This means you lose the valuable guarantees and protections that come with a defined benefit pension. You receive a lump sum rather than a guaranteed income. The pot might be large, but it doesn't provide the same security as a defined benefit pension that promises to pay you a specific amount every year for the rest of your life.

This is why, when dealing with defined benefit pensions, it's crucial to get expert advice to ensure the settlement is genuinely fair.

When is pension sharing most appropriate?

Pension sharing isn't always the right choice for every situation, but it's often the best option in the following circumstances:

If you and your spouse want to sever all financial ties and move forward independently, pension sharing is a better option than other methods. There's no ongoing connection, no need to coordinate, and no dependency on what the other person does with their pension.

If the pension holder is significantly younger than their spouse, pension attachment (where payments only begin upon retirement) would create real hardship. The older spouse might have to wait many years before receiving any benefit from the pension. Pension sharing solves this problem by giving the older spouse their own pension they can access at retirement, regardless of when their ex-spouse retires.

If one spouse has a substantial pension provision and the other has very little (often because one person gave up work or went part-time to raise children), pension sharing can directly address this imbalance. It creates pension provision for the spouse who has little or none, rather than leaving them dependent on the State Pension.

When pension assets are significant, it makes sense to share them appropriately rather than offset them against other assets. Substantial pensions are often best handled through sharing, as it ensures both parties have adequate provision for their retirement years.

Pension sharing works well when there's enough pension provision that both parties will have adequate retirement income after the share. If one person's pension is modest, sharing it might leave the pension holder with insufficient provision. In such cases, other approaches might be more appropriate, or the share percentage might need to be adjusted to ensure both parties have adequate provision.

The Pension Sharing process

If you decide that pension sharing is the right approach for your situation, here is what the process involves:

Most pension providers charge a fee for implementing a Pension Sharing Order. These fees vary between providers but typically range from around £300 to £600 per pension, though some providers charge more.

Your Consent Order should specify who pays these fees. Common arrangements include:

• The person whose pension is being shared pays all implementation fees
• Each party pays half of the implementation fees
• The fees are paid from the pension being shared before the division is made

There's no fixed rule about who should pay – it's something that needs to be negotiated as part of your overall financial settlement. However, it's important that the Consent Order clearly specify who is responsible for these costs so there's no dispute when it's time to implement the order.