What is a Pension Sharing Order?

Wednesday, 15 June 2022
|

Navigating pensions and a divorce simultaneously can be a complicated and draining process, with divorce proceedings adding an extra layer of complexity to an already technical discussion relating to your funds.

However, deciding the fate of your assets, including your pensions, does not necessarily need to be an overwhelming process – especially if you have all the knowledge and support you need to make the right decisions.

To help you understand what a pension sharing order is, and all the associated jargon and areas of consideration, Michael Reed Wealth Management has put together the below blog to hopefully guide you through this time with reliable information and advice.

What is a pension sharing order?

A pension sharing order is a court order that is used to separate two individuals' pension assets after a form of separation, such as a divorce, or when a civil partnership has been dissolved.

For many couples, pension sharing is an important aspect of the relationship, as it can often be as valuable as other marital assets such as properties. Additionally, many people depend on their spouses to support them financially throughout their life.

Without a pension order, the separation may cause these individuals to be left with no financial and/or retirement benefits. Pension sharing benefits were introduced to prevent people from finding themselves in these circumstances.

How does the pension sharing order process work?

Firstly, if you have initiated the formal divorce proceedings, the pension sharing order is issued by the court. From here, your ex-spouse must submit any documents regarding the pension arrangements that either of you have.

Once adequate information has been provided, the court will then intrust the pension provider to begin the implementation process.

If the transferee’s pension scheme allows transfers, then funds from your partner’s pension will be moved into their individual plan. Alternatively, a new pension plan will be created in the name of the transferee.

The length of this process depends on the nature of your partnership and the separation proceedings. Therefore, it could take a few months for the pension sharing order to be fully carried out.

What pensions CAN be shared?

  • Occupational pension schemes (including AVCs)
  • Personal pension schemes
  • Stakeholder pension schemes
  • S.32 policies
  • Retirement annuity contracts
  • Statutory pension schemes
  • Free-standing AVCs
  • Employer financed retirement benefit schemes - unapproved schemes
  • Contracted-out benefits, State Second Pension (S2P), State Earnings Related Pension (SERPS) and the protected payment part of the new State Pension
  • Pensions in payment from any of the above

What pensions CANNOT be shared?

  • Schemes in which the only benefits are equivalent pension benefits
  • Basic State Pension
  • New State Pension
  • Pensions the member is receiving as a spouse, civil partner or dependant
  • Pensions already subject to an earmarking or sharing order

Delay in implementing pension sharing order

If there is any kind of delay in implementing the pension sharing order, the funds will remain within the merged pension scheme and will still be available to your ex-spouse.

Failure to implement a pension sharing order is a serious problem, potentially rendering the pension company legally liable.

If any spouse or partner is at fault, they must go back to their solicitor to ask for it to be completed. However, they will be personally liable for any fees associated with this process.

Pension sharing order – crystallised benefits

A pension becomes ‘crystalised’ once someone withdraws a retirement income from their pension fund and cashes in the funds.

The earliest you can crystalise your pension is 55, unless you get early access due to ill health.

You can withdraw your crystalised pension to gain access to your pension savings either through drawdown, by withdrawing a 25% lump sum tax-free, or by purchasing annuity.

You may also need to consider disqualifying pension credit, which is where a pension credit transfer is paid from previously crystallised pension funds. This means that no pension commencement lump sum can be paid, tax free, when the receiving individual puts the funds in to payment.

Pension sharing order – can I take a lump sum?

As mentioned above, should you crystallise your pension, you may be eligible to withdraw a lump sum free of taxations.

However, in other circumstances, since the pension sharing order only comes into effect after you have become a pensioner, your ex-spouse will not be able to take a tax-free lump sum.

Pension sharing order and lifetime allowance

The pension sharing order, as part of divorce settlements, can affect either party’s lifetime allowance (LTA).

The impacts are dependent on whether an individual has given up their pension rights (pension debit), or are receiving them (pension credit), and whether or not they have a transactional pensiontransitional protection.

Typically, a pension sharing debit will not have any impacts on LTA., but it can for a transactional pension.

Pension credits, on the other hand, can see an individual receiving a pension credit claim and increase in their LTA. This can be impacted by when the pension credit rights were acquired.

For example, if they were acquired after 5 April 2006 (tax year), an individual can only claim an increase to their LTA if the original member's pension came into payment after 5 April 2006, and was in payment when the pension sharing order was made.

Are you looking for further advice regarding pension sharing orders?

Through the services provided at Michael Reed Wealth Management, you can receive additional help and support regarding pension sharing orders, ensuring your situation is dealt with seamlessly and beneficially for all parties.

Get in touch with Michael Reed Wealth Management today to discuss your individual circumstances and find out what help is available to you.

If you’re looking for assistance with pension consolidation, such as finding out more about pension consolidation benefits, Michael Reed Wealth Management can also provide information regarding this area of pensions.

 

Back to blog
Share this article
Michael Reed

Michael Reed is a Chartered Financial Planner with years of experience, providing financial advice with both conviction and empathy.

Dedicated to maximising wealth, minimising tax and protecting individuals and businesses against financial risk, Michael has expertise in specific areas of wealth management including pensions, ISAs, investment planning and shareholder protection.