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The Pensions Advisory Service

 
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The Pensions Advisory Service
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The Pensions Advisory Service (TPAS), is an independent voluntary organisation that is grant-aided by the Department for Work and Pensions. TPAS provides information and guidance to members of the public, covering State, company, personal and stakeholder schemes.

If you are going through a divorce and you and your ex-spouse are looking at dividing up your assets, the Court is required to take your pension rights into account.

Through the Court, a divorcing couple can choose to:

  • balance the pension rights against another asset, such as the matrimonial home (this is known as Pension Offsetting); or
  • arrange that when one party's pension eventually comes into payment, a portion of it will be paid to the other party (this is known as Pension Earmarking); or
  • split the pension at the time of the divorce to give both parties their own pension pot for the future (this is known as Pension Sharing).

Generally speaking, you will need to know what you and your former spouse's pensions are approximately worth. This will mean that both of you will need to ask your pension providers for valuations of your own pension pots. Your former spouse will not have any right to know what your pension value is without your consent.

You will also need to understand the implications of each of the three methods of taking pension rights into account in a divorce settlement.

The Court can issue a Court Order to occupational pension schemes (funded and unfunded, approved or unapproved), personal pension schemes, retirement annuity contracts, and 'Section 32 Buy-out' policies.

The Court can consider pension plans that you and your former spouse are currently paying into, plans that you have frozen in the past and plans that are currently paying you an income.

Arrangements that are outside the scope of the legislative provisions covering divorce are state benefits, Equivalent Pension Benefits earned between 1961 and 1975, and any pension rights a person is in receipt of by virtue of being a widow, widower, or dependant.

Pension Offsetting

All the couple's assets are taken into account and pension benefits are offset against other assets (e.g. the matrimonial home). The party with the pension rights keeps them for him/herself and the other party is given the benefit of other assets, such as the right to live in the matrimonial home.

It can be difficult to achieve a fair share of a couple's total assets by offsetting a pension pot against other assets. This may be because pension pot is by far the greater in value. Also pension values tend to fluctuate more than, say, property values. If it turns out to be difficult to achieve offsetting, one or other of the alternative bases is then likely to be used.

Earmarking

Pension Earmarking was introduced by the 1995 Pensions Act, for divorce petitions filed on or after 1 July 1996 (or 19 August 1996 in Scotland).

The pension scheme, on instruction from the Court, pays a specified amount of the member's pension and/or lump sum (in England, Wales and Northern Ireland) or a specified amount of the member's lump sum only (in Scotland) to the ex-spouse. The amount is specified at the time of the divorce but as with all periodical payment orders, either party can apply to the Court to have the amount varied. The payment is made when the spouse with the pension pot retires, say, or when he/she dies.

Earmarking has not proved entirely satisfactory in practice, as it does not achieve a 'clean break' and does not enable the ex-spouse to receive retirement income until the spouse with the pension pot retires. An additional drawback is that if the Divorce Order is for the regular payment of a pension, those payments will stop when the spouse with the pension pot dies or if the party receiving the earmarked pension remarries (for reference, the right to a lump sum under an Earmarking Divorce Order does not stop on remarriage).

Pension Sharing

The Welfare Reform & Pensions Act 1999 gave powers to the Court to split pension rights between husband and wife on divorce. This legislation is not retrospective and only applies to proceedings for divorce or annulment filed on or after 1 December 2000.

The basic concept is to separate the ex-spouse's benefit entitlement (as specified in the Court Order) from the pension scheme member's, so that there is a 'clean break'. A Pension Sharing Order is issued that creates a Pension Credit Member (the ex-spouse) and a Pension Debit Member (the member).

The Pension Credit is based on the member's Cash Equivalent Transfer Value (CETV). The Credit will be a percentage of the CETV, not a fixed sum of money. The CETV is calculated as of the day before the Pension Sharing Order takes effect, so it can be higher or lower than the value disclosed at the start of the divorce proceedings. The Pension Sharing Order takes effect from 'the date on which the Decree Absolute of Divorce or nullity is pronounced or if later, either (a) 21 days from the date of this Order, unless an appeal has been lodged in time, in which case (b) the effective date of the Order determining that appeal'.

EXAMPLE:

David and Claire are getting divorced. Claire does not have a pension; David has a personal pension plan. They instruct solicitors in March and David asks his pension company for a valuation. At that time his pension is worth £80,000. David and Claire decide that a 50:50 split of his pension is fair, so the Court orders the pension provider to give Claire a Pension Credit of 50% of David's pension. Claire is therefore expecting to get about £40,000 to put towards a pension of her own. The Decree Absolute comes through in July: at that point David's pension has gone up in value to £82,000, so Claire actually gets £41,000 as her share. If David's pension had dropped in value, to say £76,000, Claire would only get £38,000, as her entitlement can only be to 50% of David's pension.

The Pension Credit is transferable to a pension arrangement of the ex-spouse's choosing, as long as that pension arrangement can accept the transfer.

If the ex-spouse makes no choice, the trustees/scheme managers can choose whether or not to offer the ex-spouse membership of their scheme. That is, schemes are permitted to insist on a transfer out (an 'external transfer'), which will typically be to an insurance contract. However, transfer to a contracted-out scheme (money purchase or final salary) of contracted-out Pension Credit benefits (termed 'safeguarded benefits') requires the consent of the ex-spouse.

If a transfer out is not made then the scheme may provide an 'internal transfer', allowing the ex-spouse to become an own right member of the scheme. The pension credit benefits need not be on the same basis as those in the scheme. For example, the pension credit may be on a money purchase basis even though the scheme is final salary.

Pension credit members are entitled to the normal increases awarded to members with preserved (frozen) pensions.

Schemes are permitted to charge for dealing with the administration of pension sharing. Basically the cost involved in administering pension sharing should not be borne by the scheme, other members or the taxpayer. The scheme must supply a schedule of charges to the couple involved on their first enquiry. Any cost not directly relating to implementing a specific divorce order (e.g. amending the scheme rules, training administration staff, altering computer systems etc) will be borne by the scheme. The National Association of Pension Funds (NAPF) produces a table of recommended charges to be used as a guide to the industry. This can be found on the NAPF website .

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Double payment
Upon divorce in 2008 my ex was awarded 50% of my pension "pot". Naturally I started making extra pension contribution payments in order to cover the shortfall ... indeed I find it reasonable that at the age of 54 and having given her so much money that I was able to do that. Now the CSA are changing their rules to a "gross salary" payment model and I will no longer be able to afford extra pension contributions. Obviously I find it unfair that she has taken 50% of my pension and now will take another 20%, the net effect being that I can look forward to retiring into poverty. Can I go back to court and apply for an "Earmarking" arrangement so that at least I can survive after age 65?
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