A Pension Sharing Order (PSO) is an essential part of the divorce process when it comes to dividing pensions between spouses or civil partners. It ensures that both parties receive a fair share of pension assets, allowing for financial independence in retirement. This guide provides a comprehensive overview of the Pension Sharing Order process, legal implications, financial considerations, and alternative options when a PSO may not be suitable.
What Is a Pension Sharing Order?
A Pension Sharing Order is a court-issued directive that divides pension rights between spouses or civil partners during divorce. This order applies to defined benefit (DB) pensions, defined contribution (DC) pensions, and some personal pensions. It cannot be applied to state pensions or pensions held overseas unless specific provisions are in place.
The court issues the order, specifying the percentage of the pension fund that one spouse will receive from the other. The transfer of pension assets occurs under the supervision of the pension provider, ensuring that both parties are financially secure in retirement.
Key Points:
Pensions Included: Workplace pensions, private pensions, some public sector pensions, and defined contribution pensions.
State Pensions: Cannot be divided under a PSO but should be considered as part of the overall financial settlement.
Clean Break: The PSO ensures both parties have their own pension, avoiding future claims.
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Pension Sharing Order Process
The process of obtaining a Pension Sharing Order involves several steps, each of which must be completed correctly to ensure a fair financial split. Here is a breakdown of the Pension Sharing Order process:
Pension Valuation: Both parties need to request a valuation of their pensions from their pension providers. This includes obtaining the Cash Equivalent Transfer Value (CETV), which reflects the current value of the pension pot.
Legal Advice and Solicitors: It’s important to engage a family law solicitor to ensure that the correct legal steps are followed, including submitting the PSO application. Solicitors also guide the couple through the paperwork and the court process.
Court Application: Once valuations are received, an application must be submitted to the court. The court reviews the details and may issue the Pension Sharing Order.
Implementation of the Order: The pension provider will process the transfer and adjust the pension pots. The entire process typically takes around 4 months, though delays can occur.
Pension Sharing Order Finalization: Once completed, both parties will have their own pension funds in place, allowing for a clean break after divorce.
What Pensions Can Be Included in a Pension Sharing Order?
Defined Benefit Pensions (Final Salary): These pensions provide a fixed monthly income upon retirement. The pension fund is typically shared based on its CETV.
Defined Contribution Pensions: The value of these pensions can fluctuate based on investment performance, and the PSO divides the value of the pot as a percentage.
Public Sector Pensions: Public sector pensions, including NHS or civil service pensions, can also be included in a PSO.
Personal Pensions: Both Self-Invested Personal Pensions (SIPPs) and traditional personal pensions are included in a PSO.
State Pensions cannot be divided through a PSO but should be factored into the financial settlement as part of the overall division of assets.
Pension Debt: When one party is ordered to share part of their pension with the other, the person receiving the share may owe pension debt. This means they may need to account for future costs associated with managing the share, like taxes and pension charges.
Lifetime Allowance: The UK government places a limit on the amount of pension savings you can accumulate without facing tax charges. If your pension pot exceeds £1,073,100 (as of 2024), you may incur tax penalties. This is important when dealing with large pension pots in divorce settlements.
Tax Implications: Transferring pension assets through a PSO may trigger tax consequences. It’s essential to consider how these tax implications affect both parties’ future retirement savings. Seek professional advice from a tax advisor to fully understand the impact of the transfer.
Alternatives to Pension Sharing
While Pension Sharing Orders are common, they are not always the best option for every couple. There are two main alternatives:
Pension Offsetting: This involves one spouse receiving a larger share of other assets (such as the family home or savings) in exchange for relinquishing their share of the pension.
Pension Attachment Orders: Instead of transferring a portion of the pension up front, a Pension Attachment Order ensures that the receiving party gets a percentage of the pension payments when the pension begins to be paid out, rather than an immediate lump sum.
Pension Sharing Order and Overseas Pensions
Pensions held overseas present unique challenges. While a PSO cannot directly transfer a foreign pension, its value can be factored into the overall financial settlement. The court may need to request the pension provider from the foreign country to provide a valuation, which could be complex depending on the jurisdiction.
Example: A couple with pensions in the UK and the USA might use pension offsetting to account for the difference in value, ensuring that both parties receive an equal share of the total assets.
What Happens if the Transferor Dies Before the PSO is Enacted?
If the person whose pension is being shared (transferor) dies before the PSO takes effect, the order will fail. However, if the transferor dies after the transfer date, the recipient retains their share.
Case Study: Jane was entitled to 50% of her ex-husband’s pension following a PSO. Unfortunately, her ex-husband died before the transfer was completed. In this case, Jane lost her entitlement, highlighting the need for life insurance or pension protection.
Pension Sharing: Pros and Cons
Pros:
Clean Break: A PSO ensures both parties have separate pensions, reducing the possibility of future financial claims.
Long-Term Financial Security: Both spouses can independently plan for their retirement.
No Ongoing Obligations: Once the order is enacted, there are no further financial ties regarding pensions.
Cons:
Complexity and Time: The process can be lengthy, requiring careful attention to paperwork and valuations.
Costs: Solicitor and actuary fees can add up, especially if pension valuations are complex.
Tax Implications: The transfer may incur tax penalties, particularly for large pension pots.
State Pension and Child Support Considerations
State Pensions: While State Pensions cannot be shared under a PSO, they should be factored into the overall divorce settlement. If one spouse is entitled to a larger state pension based on National Insurance contributions, this can be considered when dividing other assets.
Child Support: Pension sharing has no direct impact on child support payments. However, the division of pensions can influence the amount of other assets allocated, which may impact the ability of either party to make child support payments.
Practical Advice & Checklist
Step-by-Step Checklist:
Obtain Pension Valuations: Request valuations from pension providers and receive the CETV.
Engage Solicitors: Ensure you have legal guidance to navigate the process.
Apply for the PSO: Submit the application to the court for the order.
Receive Transfer: After the order is issued, wait for the pension provider to implement the transfer.
Ensure Clean Break: Once the transfer is complete, ensure both parties have independent pensions.
Emotional Aspects of Pension Sharing
Dividing pensions in divorce is not just a financial decision but also an emotional one. It often involves long-term planning for both parties’ futures, especially when retirement funds are involved. Ensuring that the process is handled fairly can contribute to a smoother emotional transition post-divorce.
Conclusion: Is a Pension Sharing Order Right for You?
A Pension Sharing Order offers a fair and structured way to divide pensions in a divorce, ensuring both parties have the financial security they need in retirement. However, it requires careful planning, accurate valuations, and legal expertise. By considering all factors — including tax implications, alternatives like pension offsetting, and the treatment of overseas pensions — you can make an informed decision that best supports your future financial stability.
