What Is Pension Sharing On Divorce And How Do You Get It?

The Telegraph has reported that Pension Sharing Orders (PSO) rose by 11% this year. This month sees the launch of the government’s flagship ‘Auto-Enrolment’ scheme, where by everyone gets a pension unless they say they don’t want one. PSOs are increasingly becoming a commonly-used tool in the family court’s armoury, and seem now to be made as a matter of course, depending on the ages of the divorcing couple and the duration of the marriage. But what are the options available and how do you obtain one?

Background

Briefly, before the pensions legislation of the late 1990’s, the wife (often the housewife) was left in a considerably worse off position than the husband after divorce and upon retirement. This was because the breadwinner spouse had been making regular contributions from their earnings during the marriage, whereas the home-maker usually did not have that opportunity. The law was therefore changed to level the playing field, and allow a party to claim against their spouse’s pension pot. Now the court can make three types of PSO, set out below.

Types of Orders Available

1)      Offsetting

You let your spouse keep all or part of their pension in return for your getting a larger share of the other, more immediate assets, such as the home.

2)      Earmarking

You have an order which takes effect when your spouse retires giving you part of the lump sum that they can get on retirement, as well as monthly payments from the pension when it starts paying out to your spouse. The main disadvantage of earmarking is that if your former spouse dies before you, or before retirement, you lose the benefit. This does not happen with the final option below.

3)      Sharing

This is by far the best option if you are going for an order against your spouse’s pension. A pension sharing order is a way for you to get a good pension of your own, created from the pension benefits already owed to your spouse. The court order specifies a percentage to be transferred to your a pension scheme of your own, depending on how much compensation you require. Once the pension sharing order is made by the court, the trustees of the pension scheme are sent a copy of it by the court. The trustees must transfer the money out within four months into a pension scheme of your choice.  You are then free to make contributions of your own into the pension policy; it belongs to you now and there is no link with the original pension trustees, which is why it is so much better than earmarking.

There are two types of transfer: external and internal. External transfer means taking your share of the pension to another provider where you must invest it as you are not allowed to get your hands on it until retirement.

Internal transfer means that you become a member in your own right of the same pension scheme as your spouse.

How do you apply?

You simply ask the court to make the order within your divorce and financial proceedings, and ensure that the order is in the correct form. There are additional formaities, and you have to communicate with the pension trustees so that the court has up to date and accurate information about the scheme.

Points to Note About Pensions

ü  Be aware that pension schemes differ; some will allow only external transfers, and some only internal, and others allow both. You need to check the scheme rules.

ü  You should take expert advice from a pension actuary to help you decide what the best option is for you, and how much you should be asking for. It is not simply a question of your having a 50% share, as the same sum will produce a lower pension in retirement for a woman, than for a man, due to her higher life expectancy.

ü  Some pension schemes charge very high transfer fees for external transfers. It may mean that a pension share is not worth it, because of the money you would have to pay out, particularly if the pension is not very valuable in the first place.

ü  PSOs can also apply to pensions which are already in payment, but not all schemes will necessarily allow this and there may be a battle. Check the small print.

ü  It is a little-known fact that this is an area in family law that allows a second bite of the cherry. Husbands who create new pension schemes after the divorce settlement, thinking their money is safe, are mistaken. A new pension pot gives rise to a new application for a PSO by your former wife, even if you transfer funds into it from an old scheme which has previously been subject to a PSO. If you want to consolidate your schemes, do it before you finalise your financial arrangements on your divorce.

ü  There are only three pension schemes in England which cannot be shared, and all the recipients are in Parliament: the Prime Minister’s, the Lord Chancellor’s and the Speaker’s.

If this article has posed some questions for your particular circumstances please do contact us on 0845 658 6639 or by email at pd@blanchards.co.uk.

Our divorce guide may also help you, it’s free, and you can get your copy at the bottom of the page here

© Punam Denley, September 2012

Blanchards Law is a niche family law practice with divorce solicitors, mediators and collaborative lawyers. Please contact us on 0845 658 6639 or by email at pd@blanchards.co.uk