When spouses obtain a divorce or dissolution, one of the biggest obstacles they’ll need to overcome is the division of assets. For many partners, their biggest concerns will be the likes of property, investments, and business interests. However, because all assets combined make up the final terms of a settlement, the only way to ensure fairness is by getting an accurate valuation of each and every asset. And, especially in the case of high net worth relationships, a pension can be extremely valuable.
There are a number of ways to divide a pension, with each approach being unique. This makes it essential that anyone going through separation understands the specific characteristics of the big three options: earmarking, offsetting, and pension sharing orders. Of these, it’s the latter that is often seen as being the simplest way to draw a line in the sand and move on.
So what is a pension sharing order? Here, we’ll examine how they work, their benefits (and potential drawbacks), and how they differ from earmarking and offsetting. By stripping away the layers of this often challenging subject, we can help you to make sound decisions that safeguard your best interests after separation.
The Options for Division of Pensions in Divorce
When two people separate, they’ll need to disclose all assets in order to ensure that the division of their finances is fair and reasonable. As an often significant means of future funds, a private pension is one of these sources of income. It can be offset, shared, or transferred to ensure financial parity via a pension sharing order.
There may be times when more obvious assets, such as the family home, foreign properties, and other expensive possessions, are seen as taking precedence. However, any allowances either party may receive can also be vital funds, so should not be overlooked. If a pension is a feature of your divorce, your solicitor could discuss a few different ways to divide it.
These include:
- Pension Sharing: Once the courts have calculated your share in a partner’s pension you could either acquire your own pension account in your partner’s scheme or have the funds transferred to your own provider outside of the scheme.
- Offsetting: Instead of adding you to another person’s scheme etc, you could instead take possession of other assets of the same value as the pension allowance.
- Earmarking: Pension earmarking intends for a portion of a pension to be paid to an ex-spouse upon retirement.
Of these, pension earmarking is less common, as it doesn’t offer a clean financial break. This is something we’ll touch upon in more detail shortly.
How Does Pension Sharing Work?
When a pension is shared in divorce, it is divided between spouses when the relationship ends. The amount being transferred from the scheme member shows on their records as a debit, with the same value being credited to the receiving spouse. If available, the receiver can either be added to the original scheme or transfer payments to a new personal pot.
Once a couple has decided upon a pension sharing order, it will still need to be ratified by the courts. The resulting order explains the percentage of the pension to which the ‘receiving’ spouse is entitled.
For anyone keen to know more about how pension sharing works, the steps involved are:
- Value Pension: First and foremost everything starts with an accurate valuation of the pension/s and, more often than not, the instruction of a pension on divorce expert (PODE) to provide a report is necessary.
- Decide a Split: The two parties decide amounts to be shared in line with the broader financial picture and, most of the time, in line with the recommendations made in the PODE report.
- Court Order: The court will need to approve the decision.
- Implement the PSO: The pension provider will need to honour the agreement set out on the pension sharing order.
- Manage Own Pensions: The former partners continue to manage their own pension schemes independently
It’s important to note that, unlike some other assets, a pension cannot be transferred between one party and another without court intervention. Whereas it’s fairly common for former partners to transfer other valuable assets without additional formalities, pension companies will only act upon an official court instruction. Additionally, PSOs only apply to privately-owned pensions, and not state benefits.
Are Pension Sharing Orders Right For You?
Because every relationship is different, not everyone asking, “What is a pension sharing order?” will end up choosing to implement one. If you want to get the division of assets resolved quickly and cleanly, a PSO could be the ideal strategy. However, other spouses might find the potential tax implications, and the fees involved, unsuitable for them.
Advantages of PSOs
- If you’re concerned about access to finances after separation, a PSO could be a good source of income.
- It can hugely supplement your own pension savings, which is especially useful if you haven’t contributed as much as you would’ve liked over the years.
- A pension sharing order is an opportunity to make a clean financial break and move on without the hassle of having to revisit or collect payments over time.
- When there’s an imbalance in assets, a PSO could be used to ensure parity.
- With all the rules and regulations surrounding PODE reports, if one of these is obtained it is likely that the figures arrived at will be as accurate as possible.
Disadvantages of PSOs
- Anyone who was expecting to draw upon the pension in the near future could find that their nest egg has lost significant value.
- The valuation process can be time-consuming, and might even be contested if the relationship is already fractious.
- Depending on the type of the pension — and the sums involved — dividing it could have tax implications.
- Obtaining a PODE report can sometimes be costly.
Even if you’ve answered the question, ‘What is a pension sharing order?’, it’s generally better to proceed with caution. Any decision of this magnitude should always be made in consultation with a family law specialist, to ensure that it’s in your financial best interests.
What are Pension Earmarking Orders?
Also known as Pension Attachment Orders, earmarking was introduced by the Pensions Act in 1995. It allows the trustees of a pension to make payments to an ex-spouse, either from the date the member spouse begins to draw it themselves, or when they pass away. The original member stays in control of the benefit until the earmarking order comes into effect.
What’s the Difference Between Earmarking and Pension Sharing?
As we’ve discovered, sharing a pension is one option for dividing this often complicated asset. Pension earmarking represents another approach, but doesn’t offer a clean break, as it’s dependent on payment/s being made by the scheme holding spouse in the future. How it’s paid must be decided jointly to find a solution that works for everyone.
In contrast to a PSO, when a pension is earmarked, it remains the responsibility of the spouse who owns the asset. The agreed amount isn’t transferred into the receiver’s new pension, nor are they added to the member spouse’s scheme. Instead, the payment is effectively shelved until a pre-agreed point in the future.
This means that the paying partner will need to meet the conditions of the court order by paying the other spouse within that time frame. It could be that the payer has agreed to pay a one-off lump sum when they first start drawing the allowance, or that they pay a set amount to their former spouse every time they receive their payment until the ‘debt’ is finally settled.
Obtain Reliable Guidance Through Lowry Legal
As well as being an emotional period of time, the end of a relationship demands a keen eye on the financial picture. Ultimately, the only way a spouse can reasonably expect a fair outcome is when every financial factor has been discussed, valued, and then divided. The figures involved in comprehensive pension schemes can be so high that it can quickly make up a sizeable proportion of the matrimonial pot.
Lowry Legal understands that clients require legal guidance that is adaptable, sensitive, and thorough. We know that separation can be tough, so we’ll take the time to listen to your case in order to tailor our strategy closely to your objectives. We won’t make assumptions or bombard you with legal lingo, instead we’ll calmly talk through your case in plain, practical language. Your needs and goals will be at the centre of our holistic approach, with your preferred outcome all-important.
A leader in complex separations involving significant wealth, we have helped our clients to unravel extremely challenging circumstances. We’re ready to help you today.
To make an enquiry, contact the Lowry Legal team today.
