What Are Pension Sharing Orders And When Are They Ordered By The Court?

A Pension Sharing Order is a legal order made by the Family courts that redistributes a pension between two parties. These orders are made within the financial remedy proceedings that can occur following a divorce or dissolution of a civil partnership. When reaching a financial agreement upon separation, it is not uncommon for pensions to be overlooked. This can ultimately result in an unfair settlement that does not adequately provide for both parties and it is therefore paramount to consider pensions when negotiating any financial agreement. In this article, we will be discussing which pension rights can be shared, what factors the Court takes into account when making a Pension Sharing Order and what the impact of an order may be.

Pension rights may be a substantial asset to consider when a marriage or civil partnership breaks down. It is important to consider the impact that a Pension Sharing Order may have upon your other assets, as well as how much of your pension asset may be ‘matrimonial’ or ‘non-matrimonial’ (such as those accumulated before the marriage).

During the financial disclosure process that precedes any settlement (whether you’re in mediation or court proceedings), pensions will need to be valued; as a minimum this is by obtaining their Cash-Equivalent Transfer values (CETV) at that time. Some pensions are ‘defined benefit’ or ‘defined contribution’ schemes which also impacts their overall value, and the impact of any future sharing, so this information should also be obtained as well as confirmation from the scheme of any costs associated with implementing a pension share if ordered. If your pension assets are substantial, involve public sector schemes, and/or are complex you may wish to consider acquiring a professional valuation from an actuary (or a pensions on divorce expert: PODE).

Pension sharing can only be ordered where the court is making a final order (e.g. within the divorce or dissolution process) and therefore cannot be ordered within judicial separation proceedings. Pensions can be shared whether they are active, deferred, and/or in payment.

Pension sharing orders divide the rights (i.e. capital) of a pension scheme so that each spouse has their own individual rights either under that same scheme (an internal transfer) or a different scheme (an external transfer).

What types of pension rights can be shared?

Pension schemes where the rights can be shared include the following arrangements:

• Occupational pension schemes (including additional voluntary contributions) – workplace pensions provided by your employer, which are commonly either a defined benefit or defined contribution scheme.
• Personal pension schemes – an individual pension that is arranged and contributed to by you privately, rather than through an employer.
• Stakeholder pension schemes – a personal pension where your employer can also contribute.
• Retirement annuity contracts and buyout policies
• Most public service pensions and the State Earnings Related Pension Schemes (SERPS), including ‘additional’ state pension (but not the basic State pension or the new state pension since 2016).

What does the Court take into account when deciding to make a pension sharing order?

There is no obligation for the Court to make a Pension Sharing Order. The Court will consider the total value of pensions accumulated by both parties, as well as considering the wider financial picture. To do this, the court must consider the principles set out in s 25 of the Matrimonial Causes Act 1973 (MCA 1973). These include the parties’ earning capacity, financial resources, financial needs and responsibilities, standard of living during the marriage, and the age and health of both parties as well as any contributions made. The needs of any children of the family will be the paramount consideration.

Pension Sharing Orders can be made by the court either at the end of contested court proceedings or following a consent order being submitted for approval (i.e. the parties have agreed a pension share by themselves). Although less frequently ordered than pension sharing, the Court may also decide to order a Pension Off-Setting or a Pension Attachment. Pension Off-Setting is where the pension value is adjusted to offset against the other party receiving more of the non-pension assets. Alternatively, Pension Attachment is where all/part of the pension is redirected to the other party; this may be payment of a lump sum benefit on retirement or payment of all/part of the pension without the pension rights.

English & Welsh Courts cannot make a Pension Sharing Order in relation to foreign pensions unless there is compelling evidence from that scheme’s trustees or managers that an order would be implemented in their jurisdiction. These foreign pensions will still be taken into account when considering the overall division of finances.

Pension Sharing Orders are often made in cases where there is a disparity in parties’ respective retirement resources, so as to equalise the capital and/or income in retirement. A pension share may depart from equality of pension assets to meet the respective parties’ needs in retirement (particularly where parties are close to retirement age and there is a significant difference in income needs on retirement). It is therefore important to consider pensions to ensure an adequate provision for both parties in any overall financial settlement.

When does the Order take effect and what is the impact?

The order in relation to a pension share will be recorded on a Form P1 (the Pension Sharing Annex), and will be sealed by the court at the same time as the draft financial order (or consent order).

A Pension Sharing Order must be implemented by the pension provider within 4 months from the date that the order takes effect (the ‘transfer day’). The transfer day is the later of the date of the final order of divorce (formerly decree absolute), or 28 days from the date of the Pension Sharing Order. If a final order is made in the divorce before the 28 days, a Pension Sharing Order cannot be enforced until after the 28 days have passed.

Once a pension transfer has taken place (i.e. the Pension Sharing Order has been implemented), both parties have immediate control over their own pension provisions. The transferee of the pension credit receives pension benefits regardless of the transferor’s death or retirement and a Pension Sharing Order is not affected by the transferee’s subsequent marriage or civil partnership. The transferee can nominate a person to receive available death benefits relevant to the rules of the relevant scheme.

The impact of the order is that the transferor loses the percentage that is required to be transferred, and as a result this reduces the value of the fund. As noted above, this can impact the value of any additional benefits of the scheme that the transferor was previously entitled to, so it is important to understand the true ‘value’ of a pension scheme.

Whether you wish to apply for a Pension Sharing Order, or consider your options if your former spouse or partner applies for one, it is important to seek legal advice.

This is a complex area of family law and our approachable and experienced family law team can provide specialist advice on the best approach for your situation. For more information please get in touch with our family law experts on 0330 822 3451 or request a call back.