As part of your case you may be asked to consider either claiming a share of your spouse’s pension or sharing your own pension funds with your spouse. This fact sheet provides some initial information on that process but you will also be given specific guidance by your solicitor if a pension sharing order is being considered in your matter.
Initial points to note
- A pension sharing order is always expressed as a percentage and not as an exact figure.
- A pension sharing order can only be implemented at the very end of the divorce process as it requires a final divorce order (formerly decree absolute) to be effective.
- The pension company are likely to have their own administrative fees which will be charged regardless of the amount of the pension share. These charges may be higher if the pension to be shared is already being paid out.
- Even when a pension is being paid as an income stream, a capital value of the fund will be required. This is referred to as a CEV.
- A pension can be shared internally or externally. This means that the share might be required to remain within the existing scheme, or you can be compelled to take it out to a new scheme.
There are a number of different types of pension schemes but the most common are defined contribution and defined benefit schemes.
For a defined contribution scheme, a person makes payment to a fund. That money accumulates over time but investment returns may mean that it is higher or lower than the amount paid in.
For a defined benefit scheme, the payments in retirement are guaranteed by the scheme and relate to the number of years served and either the final or average salary over the period of employment. Most public sector schemes are defined benefit schemes.
Reasons for a pension report
A pensions on divorce expert (PODE) may be approached for a number of reasons. Their assistance is always required to calculate when the sharing is to achieve both spouses receiving the same income in retirement. They can also be used to ensure that all pensions are considered at a fair market value, when comparing different types of pension, as above.
What a pension report may cover
The PODE may be asked to:
- Consider a fair market value of all schemes. For some defined benefit schemes particularly those in the public sector, this is likely to result in a higher CEV.
- Calculate the share required so that each spouse has the same capital amount in their respective pension funds – this is referred to as equality of capital.
- Calculate the share required so that each spouse has the same income in retirement taken to be from a set date. The report can work on more than one date and the cost of the report will increase the more alternatives ae considered.
- Advise on what the pension share in any of the above scenarios would be worth if it were taken as a share of another liquid capital asset, rather than a share of a pension. This is known as off-setting. There is no one agreed approach to off-setting so you will find that the PODE’s recommendations here can be more general, often giving a band of potential values that can be used.
Implementation
A pension sharing order is made as part of a final financial order. The final divorce order (formerly decree absolute) then usually follows. It is advisable to leave a gap of 28 days between the date of the final financial order before applying for the final divorce order.
All documents are then served on the pension company which has four months to implement the pension share. Pension companies often state that the four month period will not start until they have received payment of their fees. Unless it is an internal transfer, they will also require the party receiving the pension share (known as a pension credit) to identify the fund into which it is to be paid.
It is important that you take independent financial advice when pension shares are being discussed as a solicitor or mediator cannot give you financial advice.
