Pension Sharing Explained
Pension sharing is an option available during divorce or the dissolution of a civil partnership. It allows for a clean financial break by dividing pension assets immediately, enabling each party to independently decide how to manage their share.
How Does Pension Sharing Work?
A court may issue a pension sharing order (PSO), which determines how much of the pension is allocated to each party.
The amount is typically expressed as a percentage of the transfer value of the pension being divided. In some cases, it can also be expressed as a fixed amount.
For instance, if the total value of the pension is £100,000 and a 50% share is ordered, each party would receive £50,000. The transfer value is calculated based on the value of the pension the day before the PSO becomes effective.
Advantages and Disadvantages of Pension Sharing
Advantages
- Facilitates a clean financial break.
- Ensures that both parties have resources for retirement.
- Future changes in circumstances, such as remarriage or death, do not impact the arrangement.
Disadvantages
- One party’s future pension income or lump sum may be reduced.
- Providers may charge fees for splitting the pension.
- Some types of pensions can be challenging to divide.
- For individuals with high pension savings, the additional pension credit may have tax implications. Professional advice is recommended.
After Being Awarded a Share of a Pension
The portion allocated to the ex-spouse or partner is referred to as a “pension credit.”
Options may include:
- Joining the original pension scheme, if allowed.
- Transferring the share to a new or existing pension scheme that accepts transfers.
Professional financial advice may be necessary to facilitate the transfer. Additionally, note that the transfer value may fluctuate between the time of the quote and when the order is implemented.
It is common for pension schemes or providers to charge for administrative processes related to the sharing order.
Timelines for Implementing Pension Sharing
Providers generally have up to four months to implement a pension sharing order after receiving all required information. However, delays may occur if information is pending from third parties, such as financial advisers or legal representatives.
Once the order has been implemented, it is advisable to verify the accuracy of the new pension benefits and request regular statements from the pension provider to monitor any updates.
In cases of discrepancies, you may contact the pension provider for review.
Pensions Already in Payment
Pension sharing can be applied to pensions that are already being paid out, though the process tends to be more complex and associated with higher fees.
Issues with Transfer Value Calculations
Under a pension sharing order, pension benefits must be assigned a value, referred to as the cash equivalent transfer value (CETV).
If there are errors in calculating the CETV, these should be addressed promptly. Legal advice may be needed to correct any mistakes, as errors can result in underpayment or overpayment.
If a miscalculation is identified, the pension provider is required to rectify the issue. This may involve compensating for underpayments or recovering overpayments, depending on the circumstances.
This guide provides an overview of pension sharing during divorce or civil partnership dissolution, outlining the process, potential benefits, and possible challenges. Seeking professional advice is recommended to ensure that all aspects are handled appropriately. Founded in 2017, Fintuity has fast become one of the only digital Independent Financial Advisers (IFA) in the United Kingdom. Fintuity offers a wide range of financial advisory services including pensions, protection, investments and mortgage advice. The key difference is that as an exclusively digital service, we can offer significant savings and a service that is direct to you and on demand.
