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  • Pension sharing explained

    Pension sharing explained

    Pensions are just one form of assets to be divided in divorce or dissolution proceedings. The starting position is the same as other assets, i.e. equality. However, pensions are dealt with in a different way to ‘liquid assets’.

    When a Pension Sharing Order is made by the Court or agreed by the parties in a Consent Order, some of one spouse’s pension benefits are transferred to the other. Each spouse is then free to pay more into their pension and receive the benefits of their own pension independently of the other.

    How the pension share works depends on the type of scheme to be shared. There are two types:

    Money Purchase and Defined Contribution Schemes

    All personal pensions and some company pensions fall into this category. The receiving spouse has to invest their share into a different pension plan by way of an ‘external transfer’.

    Final Salary and Defined Benefit Schemes

    Common examples of final salary schemes include NHS, military and teachers’ pensions, although other organisations offer final salary schemes for employees. The pension received is based on the employment record of the spouse. It is possible to transfer the benefits to a spouse so that they remain within the same scheme (‘internal transfer’).

    Defined benefit schemes are usually offered by private companies and it is generally the case that the benefits are transferred to a different scheme (‘external transfer’).

    How does it work?

    It is generally the case that a percentage is transferred from one spouse to another and this percentage is stipulated in the Pension Sharing Order. Agreeing the percentage is part of the financial negotiations, but it is not always straightforward. It is not generally the case that an equal split would provide both parties with an equal pension at retirement.

    Some financial negotiations can be complex and pension sharing sometimes requires specialist advice from an independent pensions advisor and/or an actuary.

    Of course not everyone wants to or can afford to go to the expense of appointing an actuary or paying for specialist pensions advice. They just want to agree a percentage split. If the scheme concerned is a final salary or defined contribution scheme, it is not advisable to proceed without specialist advice and even with personal pensions or defined contribution schemes, where it is easier to value a fund of cash or investments, it is still a good idea to take some pensions advice.

    What about State Pensions?

    There are two types – Basic State Pension and Additional State Pension.

    An Additional State Pension is an enhanced pension related to earnings.

    Both types are taken into account when calculating a total pension value. However, a Basic State Pension cannot be shared, whereas, in theory, an Additional State Pension can be shared.

    How are pensions valued?

    Pension providers calculate a Cash Equivalent Value (CEV) or Cash Equivalent Transfer Value (CETV). Sometimes this information is provided on an annual statement, but in most cases the information has to be requested. This information can take some time to obtain – up to a few months.

    Word of warning

    Pensions and pension sharing is a very complex area of law and taking advice is highly recommended.


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