When trying to sort out the financial claims in a divorce, some of the most important assets (and often, among the most substantial) are both parties’ respective pension pots.
In a shorter marriage of only a few years, it is more likely that both spouses walk away from a divorce retaining their own pensions entirely, but in longer marriages (typically 8 years or more from the date the parties began cohabiting, rather than the date of the marriage itself), it is almost always the case that a court will try to achieve equality of income for both parties at normal retirement age by sharing pensions. This is generally the case, even where the other assets of the marriage are divided unequally if one party’s needs require this and/or it is fair and equitable to do so.
Practically, this will usually require the spouse with the larger pension provision to transfer a portion of their pensions to the other spouse so that at state retirement age both would be able to draw down the same level of income from their pensions. This is commonly referred to as a ‘pension share’ or a ‘pension sharing order’. There are other options available, but pension sharing orders are the most commonly used.
In principle, the court’s approach to sharing pensions is easy to understand, but complications arise in actually calculating what proportion of a party’s pension(s) should be transferred to the other. There are often multiple pension scheme (even with the same provider) and each scheme is subject to its own rules and regulations.
The key information to ascertain is the ‘cash equivalent transfer value’ (CETV, or CEV) of each scheme, which is the theoretical capital value of the pension if it were encashed. Even then, it is not simply the case of adding the CETV of each scheme and dividing in half as certain schemes may be worth more in terms of the income they can generate, or come with other benefits, which should be taken into consideration.
More often than not, the parties decide or the courts order that an expert should be jointly instructed to report on how to achieve equality of income at normal retirement age. Typically, this expert is an actuary, commonly referred to as a ‘pensions on divorce expert’ (PODE).
Instructing a PODE to provide recommendations is, unfortunately, not a cheap or quick process, but gives the parties the ability to make informed decisions with the benefit of expert knowledge. PODEs can also be asked to comment on how one party’s entitlement to a pension share may be ‘offset’ by their receiving additional capital sums instead of pension-sharing, as well as separate calculations if one party seeks to exclude the portion of their pension accrued prior to the start of the relationship.
PODEs are also able to provide advice where one or both parties have a UK public sector pension scheme affected by the McCloud remedy, i.e. changes to certain schemes adopted following a 2018 Court of Appeal case.
After the proportion of one party’s pension(s) to be shared with the other party has been established, this will be recorded alongside the other elements of the agreement or judge’s decision in a ‘financial remedy order’ (FRO) made by the court, as well as a ‘pension sharing annex’ (PSA) which accompanies the court order.
Once the FRO and PSA have been approved by the court, both documents are then shared with the pension provider(s) who will confirm any additional information / fee they require. Once both parties have provided any requested information and/or fee, the pension provider(s) then have four months within which to implement the terms of the pension share by transferring the agreed percentage of the relevant scheme(s) into a nominated scheme of the receiving party’s choice. Some pension schemes will not allow this kind of “external transfer” and so the receiving party becomes what is referred to as a “shadow member”. The most important feature of a pension sharing order however is that the proportion of the pension transferred becomes the property of the receiving party and is no longer under the control of the transferring party.
At Porter Dodson, we work with people across Dorset, Devon, Somerset and further afield to protect their financial interests following matrimonial breakdowns. If you're facing uncertainty about your financial future, we’re here to help.
Don’t leave it to chance. Pension sharing could be the key to protecting your future.