Our Technical View, published in October 2017 introduced you to the topic of Pensions and Divorce. This month, in recognition of Divorce Day (8 January), we are looking specifically at pension sharing orders, what they are and how they can affect your client’s pension pot.
So, what is Pension Sharing?
Pension Sharing is where a scheme member’s pension rights are valued at the time of divorce/dissolution and shared (split) between the scheme member and the ex-spouse/ex-civil partner. In England and Wales this can only be done as part of the financial settlement on divorce/dissolution of a civil partnership if the courts make a pension sharing order. In other words, a couple cannot just agree that part, or all, of one of their pension arrangements is split and transferred to the ex-spouse/ex civil partner. To do so would constitute an assignment. This is classed as an unauthorised payment and is subject to very penal tax charges.
There are some differences in Scotland but for the purposes of this Technical View we will focus on the rules for pension sharing in England and Wales.
A pension sharing order must do three essential things. It must:
a) state that pension rights held by one party are to be shared for the benefit of the other;
b) state the percentage of the rights to be shared in this way, or (in Scotland only) the amount to be shared; and
c) identify the pension arrangement(s) which are affected.
Important points to remember about pension sharing:
- allows the couple to achieve a ‘clean break’ at the time of divorce so there is complete financial independence;
- applies to all types of pension arrangements including Occupational Pension Schemes, Personal Pensions (including SIPPS), Stakeholder Pensions, Additional Voluntary Contributions (AVCs);
- applies to all types of pension scheme members including those in receipt of income withdrawals or pensions in payment;
- the pension scheme member will see a reduction in their pension benefits which reduces the value tested against the lifetime allowance (LTA). They can normally rebuild their pension benefits but care is needed if the individual has certain forms of protection, e.g. enhanced or fixed protection. Meanwhile the ex-spouse’s pension credit will form part of their pension rights and will be tested against their own LTA, which can, if feasible, be enhanced because of the pension credit. Again care is needed if the ex-spouse or civil partner already has some form of LTA protection in place;
- death in service benefits are not included, such as a separately insured lump sum death benefit, e.g. where an employer provides such benefits alongside workplace pensions. These death-in-service benefits remain with the individual;
- generally, do not apply to the State Pension. But, see following Note…
Note: For those whose State Pension age was before 6 April 2016 and therfore fall within the old regime, it is possible to share the State Earnings Related part but not the Basic State Pension. For those whose State Pension age is on or after 6 April 2016, any protected payment may be shared. Broadly, this is the converted value of the additional pension at 5 April 2016 under the transition rules and will be shown on an individual’s State Pension forecast (at 6 April 2016 individuals have a starting amount. If this is more than the full new State Pension at the 6 April 2016 level the part of starting amount which is above the full new State Pension is called the 'protected payment').
Comment: If an individual has a number of pension plans those involved in the pension sharing process may consider whether it’s best to have a pension share on each pension plan or perhaps where the pension assets are not so easy to split (such as a commercial property), leave this as it is and transfer a higher percentage, or even 100% of a pension plan with more liquid assets to the ex-spouse. Likewise, as any separately insured lump sum death benefits cannot be shared maybe an earmarking/attachment order could earmark death benefits for the benefit of the ex-spouse.
What benefits have to be taken into account in a pension share?
The benefits/contributions to be taken into account are those paid or accrued up to the "transfer day", which is when the pension debit and credit become effective and the rights are deemed to be transferred from the scheme member to the ex-spouse. In practical terms the "transfer day" is normally the later of:
- The date of the decree absolute;
- 28 days from the date shown on the pension sharing annexe which is stamped by the court.
Comment: This timeframe is set out on the final page of the pension sharing annexe to the Court Order.
The actual physical transfer of benefits takes place at a later date during the implementation period for the pension share. This is known as the "valuation day". The benefits/contributions to be transferred will be valued on this day, which is chosen by the person responsible for the pension arrangement. But, only taking into account pension savings made up to the transfer day. Comment: This is often a point of confusion and misunderstanding by those involved.
Certain information has to be provided to implement a pension share. Until this is done it is not possible to transfer any benefit to the ex-spouse and achieve the clean break.
Who is the person responsible for the pension arrangement?
This will either be the pension scheme trustees or scheme manager, depending on the type of pension arrangement. Normally for Sanlam pension contracts this will be Sanlam Investments and Pensions.
How is a pension share implemented?
The court makes a pension sharing order. Here it will state the percentage of the value of the scheme member’s pension rights which are to be credited to the ex-spouse/ex-civil partner (Pension Credit) and the member’s pension benefits should be debited by a corresponding amount (Pension Debit). For example, if the amount credited to the ex-spouse/ex-civil partner is 40% of the value of the member’s benefits, based on a specified transfer value quotation, then there will also be a debit to the member’s benefit equal to 40% of the value of their pension fund/benefits.
Comment: As mentioned earlier a pension sharing order can transfer 100% of the pension to the ex-spouse and perhaps leave another pension plan untouched- this is not unusual. It really does depend on the circumstances of each case.
The pension sharing order will normally be set out in a standard form.
This must be implemented within 4 months of the transfer day or, if later, when all the information needed to implement the order is received. Normally, the ex-spouse or civil partner must be offered:
In line with the pensions on divorce regulations the person responsible for the pension arrangement must ensure that by the end of the implementation period the ex-spouse or civil partner has transferred their pension credit to another suitable pension scheme/plan. Both the scheme member and the ex-spouse/civil partner need to be kept informed throughout the process.
Are there any charges for implementing a pension sharing order?
Yes. There is normally a charge, for example Sanlam’s current charge is £500. Details of any charges are provided at the beginning of the pension sharing process. How these charges are paid is agreed as part of the financial settlement and details of who pays are shown on the pension sharing order itself. Often this will be split on a 50/50 basis between divorcing parties. The charge can be deducted from both the pension debit and the pension credit.
Divorcing clients need financial advice on pensions and divorce to ensure that they can make an informed decision on which of the options is the most appropriate to suit their own circumstances.
Next time we will look at a number of FAQs associated with pension sharing, such as:
Are there restrictions on how an ex-spouse/civil partner can take benefits relating to his or her pension credit on divorce?
How are pension credit and pension debit rights treated against both the annual and lifetime allowances?
How is lifetime allowance protection affected when a pension sharing order is made?
What are the timescales for finalising pension sharing orders and when does the clock start ticking?
After this we will compare and contrast how earmarking / attachment orders measure up against pension sharing.
This note is to be used by Financial Advisers only. It is not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document are based on current tax law and HMRC practice as at January 2018 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should always be sought