There are three standard ways of dealing with the division of pensions in divorce.
Offsetting – where one party retains a greater or total interest in the pension assets and the other party retains a greater or total interest in another asset of equivalent value.
Sharing – where a court order is made that results in a debit against the pension of one party and creates a corresponding credit in a new pension for the other party.
Attachment – (also known as earmarking) where a court order is made resulting in a deduction from each pension instalment as it is due and a corresponding payment to the other party.
Offsetting is the most common option as it is the simplest and least expensive to implement. A common example of offsetting is where instead of each taking 50% of the property and 50% of pensions, one spouse takes 70% of the property equity and 30% of the pension and vice versa.
Pension sharing was introduced in 2000 and was designed to provide the clean break that attachment fails to achieve. The debit, which is defined in terms of the capital value of the pension (a CETV for a deferred pension or a CEB for a pension in payment), is made against the pension when the order is implemented. At the same time, a corresponding credit is made for the other person. This is called a pension credit, is effectively a new, and entirely separate pension entitlement, thereby achieving the desirable “clean-break”.
Pension schemes have the option to deal with pension credits as either internal credits or external credits. Most public sector schemes only offer internal credits. Internal credits are sometimes called “shadow” membership but this is a misleading term as the benefits are not always exactly the same as those provided to the original (pension debit) member. Some schemes do not provide dependants pensions for pension credit members and unlike the pension debit member, a pension credit member does not usually have the option to commute part of the pension and take a tax-free-lump-sum.
The retirement age for a pension credit member may also differ from that of the debit member. From a retirement age perspective, a pension credit member is usually treated as a deferred member of the scheme. In other words, the same as someone who has left the employment and therefore the scheme before retirement. By contrast, some schemes, particularly those for members of the uniformed services have preferential early retirement terms for active members.
The retirement age for a pension credit member is likely to be 60 or 65. For these reasons, a pension credit member will often find that they start receiving their pension several years after their former partner does. This can be a particular issue if the shared pension is in payment, as the result is an immediate reduction in the income produced by the pension.
If a pension sharing order results in an external credit, the credit has to be invested in a suitable pension arrangement. As this often means a money purchase pension, this means that the credit member bears the investment and inflation risks that may apply to the pension debit member if the pension were a defined benefit arrangement with a specific pension promise.
Pension attachment orders could be compared to a form of maintenance where the payment is made direct from the pension scheme. Attachment orders have several disadvantages.
The pension ceases on the death of the pension scheme member and therefore the recipient’s pension also ceases.
The attachment ceases if the recipient remarries
The attachment and pension payments only commence when the scheme member retires, the recipient is unable to influence the retirement date, which could be deferred by the member.
The rules dealing with assets, and therefore pensions in divorce, differ between Scotland, where only the pension “earned” during the relationship is counted, and England, Wales & NI where often all the pensions are counted.