It is an unfortunate reality that many marriages end in divorce.
What happens to valuable pension benefits in the event of divorce?
There are three different ways of dealing with pension benefits upon divorce
Pension sharing orders and offsetting provide a ‘clean break’ solution.
There are two ways in which a spouse/registered civil partner can receive a pensions share
The former spouse/civil partner will be entitled to a pension credit equal to the value of the pension debit against the member’s pension rights.
Pensions are often a very important asset in divorce proceedings and next to the former matrimonial home, the pension provision of one or both spouses may be the largest capital asset of the marriage.
Sharing of pension rights on divorce has become a highly important topic
Pensions sharing offers a clean break settlement and gives the ex-spouse or ex-civil partner legal ownership and control over his/her share of the pension.
In simple terms the benefits are transferred to a plan in the ex-spouse’s name.
This profile concentrates on the pension sharing options available for divorce, nullity and dissolution proceedings started on or after 1 December 2000 (December 2005 for registered civil partners), however the previous options of offsetting and earmarking continue to be available.The decision on which option is chosen will be either by agreement between the divorcing couple or by court order.
Pension sharing on divorce or dissolution of a civil partnership has various advantages and disadvantages.
Sharing orders may be applied to all accrued pension benefits, including 'former' protected rights, guaranteed minimum pension (GMP) and section 9(2b) rights (up to 6 April 2009, these benefits had been collectively known as 'safeguarded rights' after sharing), and pensions already in payment.
Sharing orders may not be made in respect of benefits payable under the Basic State Pension; the state graduated pension (predecessor of SERPS) and its contracted out alternative (i.e. equivalent pension benefits). Also survivors pensions paid as a result of a previous marriage may not be subject to a pension sharing order.
Although benefits under the basic state pension cannot be shared, an individual may be able to use the national insurance contribution record of their former spouse to increase their own state pension up to the single person's maximum (known as state scheme substitution). A BR20 claim form can be found on the following link
The Government's White Paper has outlined the replacement of the current state pension system with the single-tier flat rate pension of £140 per week from April 2016. The single-tier pension hasbeen designed to ensure the large majority of individuals will be able to receive the full rate in their own right. After April 2016 pension sharing will not be applied to the single-tier pension – individuals will not be able to inherit or derive state pension income based on the National Insurance record of their spouse or civil partner. However, existing sh are orders will be honoured and there will be transitional protection to cover a number of scenarios where the Government regards it is just to recognise contributions made prior to the implementation of the single-tier pension.
The amount to be awarded to the ex-spouse may be decided by the court or between the divorcing couple. The amount is then expressed in a pension sharing order or agreement approved by the court.
Pension sharing orders in England and Wales are expressed as a percentage of the cash value of the plan, known as the cash equivalent transfer value (CETV), to be re-allocated to the ex-spouse. In Scotland the amount may be expressed as a fixed monetary amount.
The trustees of a trust based scheme, or the manager of non-trust based scheme has to provide certain basic information to the court, member and the ex-spouse. Where a valuation of benefits is required, the information must be provided within three months of the request (or within six weeks if proceedings have commenced). However, the Court can ask for the information to be provided within a shorter timescale.
Where no valuation is requested the information should be provided within one month.
Further information must be provided within 21 days of being notified that a pension sharing order may be made, unless the prescribed information has already been supplied.
not part of any pensions and divorce legislation it is simply the trading of assets between the two parties. For example – “you can have the savings account and I’ll keep the pension.” The advantage of offset is that it is easy to understand and is done at the time of the divorce and allows for a clean break. However, the downside is that sometimes there are insufficient assets to cover the amount of pension to be offset.
This allows a portion of benefits to be earmarked for the ex-spouse. The benefits continue to be held in the original member’s plan until retirement, when the benefits will be paid to the respective parties in the proportions required by the earmarking order. Dependants’ pensions cannot be earmarked. In Scotland, only lump sums and not pensions can be earmarked.
Earmarking is a simple solution and the advantages are as follows
