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When a couple divorces, the division of pensions can be a complicated process. In this complete guide I'll teach you everything you need to know about pension sharing orders, including:

  • What is a pension sharing order?
  • How do they work?
  • What are the alternatives?

And more

Let's take a look...

What Is A Pension Sharing Order?

A pension sharing order is a court order that instructs a pension provider to divide a pension pot between two people. This usually happens when a couple divorces and they need to divide any pensions that they have built up during the marriage.

A pension sharing order can only be made by a Court, and will set out what percentage of the pension will be awarded to either spouse.

How Does A Pension Sharing Order Work?

A pension sharing order is made by the Court, and will set out what percentage of the pension should be awarded to each spouse. The pension provider will then divide the pension pot accordingly.

There are two way to get a pension sharing order:

  1. Agree between yourselves how to split the pension, and ask the court to approve your decision.
  2. Ask the court to decide how to split the pension, if you can't agree between yourselves.

Couples can often agree how to split the pension pot between themselves, usually as a part of an agreed divorce settlement negotiated on your behalf by your solicitors or a divorce mediator.

If this is the case, then the court can approve the agreement and make the legally binding pension sharing order.

If you can't agree between yourselves, then you will have to ask the court to decide for you. This is often completed as part of an overall contested divorce settlement, where the court needs to divide all the marital finances, such as the family home and other assets.

When deciding this, the court will take into account a number of factors, including:

  • The value of the pension
  • How long the couple has been married
  • Each person's age and health
  • Each person's income and ability to support themselves in retirement
  • The needs of any dependent children

Once the court has made a decision, they will issue a pension sharing order which is then sent to the pension provider. The pension provider will then divide the pension pot in line with the court order.

How Is The Pension Divided?

The pension will always be split between you in terms of a percentage.

Eg. if the pension is worth £100,000 and the court orders that 50% should be shared, then each person would get £50,000.

It's not possible for the court to order a fixed sum to be paid from the pension pot (eg £75k) because the pension value changes over time. Therefore, the division will always be expressed as a percentage.

If the court are to decide what the percentage will be, they will try to achieve fairness. This can often mean a 50/50 split is taken as the starting point, but there may be a number of factors that mean it's fair for one person to get more or less.

To learn more abut how the court determines what a fair divorce settlement should be, check out my separate guide on divorce settlements:

How Does a Pension Sharing Annex Establish a ‘Clean Break’?

Financial consultants prefer  pension sharing orders over other post-marriage or post-partnership pension schemes. This is because PSOs allow for a clean break between the former couple. How so?

  • The transfer values are discussed a day ahead of the final pension sharing order. 
  • On the day of, the transfer value is issued in the financial settlement: meaning that one partner will receive a percentage out of the other’s pension fund.

Bottom line: once the court has issued a PSO, you and your partner have no reason to communicate further. Your partner’s pension scheme administrator will handle correspondence from there on.

This allows both the partners to exit their marriage or partnership with a clean financial break - most of the time.  

Keep In Mind:
A financial advisor will guide you through the process but there are a few things you might want to keep in mind about the PSO, either way.

  1. Some of the transfer value may be incorporated into a partner’s subsequent pension scheme, or given away as matrimonial income. 
  2. A court’s ruling may be different from the value that you and your ex-partner have mutually agreed upon. 
  3. The court can also include in the transfer value the costs of the calculation and administration of the pension order. 

Do I Need To Get My Own Pension Provider?

In a pension sharing order the amount awarded to the receiving party is called the "pension credit".

If you are awarded a pension sharing order as part of your divorce, then you will need to set up your own pension with a pension provider and pay in the pension credit, as your ex-partner's pension provider will not be able to keep paying into their pension pot on your behalf.

You can either use the money that forms the pension credit to start a new pension altogether, or you can transfer the pension credit to another pension that you already own elsewhere.

The paying party keeps the old pension.

How Is The Pension Valued?

The pension sharing order will give a percentage of the pension to the receiving spouse, but how is the pension valued in the first place?

As pensions can be quite complex, it's best to get professional help when valuing a pension for divorce purposes. This will ensure that you understand all the features and benefits of the pension, as well as any pension enhancements that may have been made, such as voluntary contributions.

A pension actuary will carry out the valuation and produce a report which can then be used in negotiations or submitted to the court. The pension actuary will take into account things like:

  • The type of pension scheme
  • The value of benefits already accrued
  • How long until retirement
  • The current pension holder's age
  • Life expectancy
  • Any early retirement penalties
  • Tax implications

Which Pension Types Are Eligible For Pension Sharing Orders?

Not all pension schemes are eligible to be included in apension sharing order. Here’s a list of those eligibilities:

Eligible For PSOs

  • Occupational Pension Schemes
  • Personal Pension Schemes
  • Section 32 Policies
  • Stakeholder Pension Schemes
  • Retirement Annuity Schemes
  • Statutory Pension Schemes
  • Free-Standing AVCs
  • Employer Financed Benefits

Not Eligible For PSOs

  • Basic State Pensions
  • New State Pensions
  • Schemes in which the only benefits are equivalent benefits
  • Pensions the member is receiving as a spouse, civil partner, or dependent
  • Pensions already subject to an ear-marking or off-setting order



What’s The PSO Process Like?

The process for a pension sharing annex isn’t as complicated as you’d expect. Here’s a run-down:

  1. Applying for a Financial Remedial Proceeding (Form A)

First, you apply for Financial Remedial Proceedings immediately after the dissolution of your marriage or partnership. 

To initiate this, the person applying for the pension scheme order, that is not the pension fund member, will be asked to fill out Form A.

If the ex-partners cannot agree on the terms by themselves, a financial advisor is assigned either through the court or outside.

PS: your divorce lawyer cannot act as a financial advisor.

  1. Applying for Cash Equivalent Transfer (Form E)

Before the first appointment, both parties or their financial advisor will have to submit Form E –  a document that showcases the value of the pension pot in terms of cash: also known as the Cash Equivalent Transfer Value or CETV.

The pension pot does not include just one pension scheme – a pension fund member can actually receive multiple pension schemes. If that’s the case, then the recipient will have to declare all of those plans to the court during the PSO procedures. 

The CETV is also used to quantify non-cash related benefits including housing, transportation, and more. 

The court will ask the advisor about the CETV, which is needed on the day of the divorce as well. 

  • A value calculated longer than 12 months prior to the separation will not hold in court for the application of a pension sharing order. 
  • The CETV needs to be thoroughly completed and examined within three months of the divorce proceedings. 

In some cases, the court may ask the pension provider to submit Form P which regulates the terms of the pension sharing order. However, the form might not be needed if both the partners agree to the terms set by the court or by their financial advisor. 

  1. In Case of An Appeal

The pension provider can appeal the court’s order no later than three weeks after a court has issued the financial agreement.

The pension provider - that is the person responsible for working out the CETV and then appealing the financial settlement -  would either be paid by 

  • Both parties, or 
  • By the pension fund member – that is, the person whose pension is being divided.

When the pension sharing order has been implemented, you can ask your pension provider, or pension scheme, for a statement of your benefits.

Most schemes will automatically send you a benefit statement each year.

What Documents Are Needed To Set A Pension Order In Motion?

To recap, the pension provider will need to have the following things in order:  the CETV, the transfer values, and quantifying the pension pot of the pension fund member.

Once that’s done, they’ll need to submit the following documents three months ahead of the Second Appointment with the court:

  • A copy of the sealed financial order
  • A copy of the pension sharing annex (setting out details of the pension share to be implemented)
  • A copy of the decree absolute (if the divorce petition was issued before 6 April 2022) or final order (if the divorce application was issued after 6 April 2022)
  • Payment for any pension sharing charges

A pension sharing order takes effect from one of the following three dates: the date of the decree absolute, the date of the final order, or 28 days from when the pension sharing order is approved by the court.

However, be prepared for delays – third parties; pension providers, advisors, and lawyers aren’t necessarily adherent to a strict deadline, but their input is crucial to complete the documentation.

Any Downsides To Having A Pension Share Order?

Pension share orders are the simplest and preferred solution by divorcing couples. Usually, the pros outweigh the cons – especially the fact that a PSO will establish a clean break between the two parties. 

However, PSOs are not without their own downsides. 

  • It might be difficult to divide pensions in a Small Self-Administered Scheme.
  • There’s usually a fee to be paid to the court/ the pension provider.
  • For high earners, the pension credit could affect the recipient’s lifetime allowance by increasing their pension provision.

Pension share orders are the simplest and preferredsolution by divorcing couples. Usually, the pros outweigh the cons – especiallythe fact that a PSO will establish a clean break between the two parties. 

However, PSOs are not without their own downsides. 

  • It might be     difficult to divide pensions in a Small Self-Administered Scheme.
  • There’s usually a fee to be paid     to the court/ the pension provider.
  • For high earners, the pension     credit could affect the recipient’s lifetime allowance by increasing     their pension provision.

Will I Need To Go To Court?

If you wantto get a pension sharing order, you will need to go to court. This is becausepension sharing orders can only be made by a Court.

You shouldspeak to a solicitor before going to court, as they will be able to advise youon the best course of action and represent you in court.

But though it is technically a court order, it is anecessary part of even many amicable divorces. This is because unlike with someassets such as the family home, you and your spouse cannot simply make anagreement between the two of you. Pension schemes require a court order to makethe necessary changes.

So why can’t the same be done for pensions? Well,pension providers or pension schemes cannot carry, divide or transfer anypension without instruction from the court. That doesn’t mean you’ll spend anytime stood up in a courtroom, though.

What Are The Alternatives To A Pension Sharing Order?

Since pensionsare a lump sum of the matrimonial pot, they’re considered to be part ofthe divorcing party’s Financial Support Plan. 

But, there areother options besides pension sharing annexes for two separating partners.These include the following:

1.         DeferredLump Sum

The pensionfund member will pay a deferred lump sum, tax-free pension amount to theirex-spouse. This amount is only withdrawable upon retirement and doesn’t applyin Scotland.

2.         PensionAttachment/Pension Earmarking:

The pensionfund member will supply their former partner with a transfer value if andwhen they retire. 

This optionisn’t a clean-break option, though; and that’s because the court can’tstipulate when the fund member will receive their pension.

3.         PensionOff-setting:

The onlyfor-sure way a pension fund member receives all of their pension is byoffsetting the amount with something else from the matrimonial pot. 

In most cases,the pension value is offset by something of either similar or greater value –such as the family home.

4.         IndividualAgreements:

An individual agreement is a mutual  agreement between the two  separatingpartners. Usually, these agreements don’t involve the court but, if presentedbefore one as a formal agreement, they become actionable. 

If you are getting divorced and you have a pension, then it is likely that the pension will need to be divided between you and your ex-partner.

There are three ways to divide a person when you divorce:

  1. A pension sharing order
  2. Pension offsetting
  3. A pension attachment order

In many cases, pension sharing will be the best option as it allows both parties to keep their own pension pots and have more control over how they are invested.

In pension offsetting, the pension is not divided but is used to offset other assets, such as the family home. This means that one person keeps the pension and the other gets something else of equal value, such as a greater share of the equity in the family home.

A pension attachment order (aka pension "earmarking") is where one person keeps the pension and pays a fixed sum of money to the other person when they retire. It is similar to spousal maintenance. This is not common anymore as it can be unfair, as the pensioner could die before they have paid off the earmarked amount, leaving their partner without any pension income.

To learn about the other two options in more detail, check out my separate guides. (HL)

If you'regoing through a divorce, there are a number of different ways that your pensioncan be divided. These include:

Pension offsetting:This is where the pension pot is offset against other assets, such as propertyor savings.

Pensionearmarking: This is where a portion of the pension is set aside for the otherperson when they retire.

Transferringthe pension to the other person: This is where the pension pot is transferredin its entirety to the other person.

Which optionis best for you will depend on your individual circumstances. You should speakto a financial advisor or solicitor to get expert advice on what is best for you.

 

FAQ

What If There’s An Error In The CETV?

If you feel that there’s been an error in the CETV, you need to act immediately. 

In case a court-appointed advisor or pension provider has made a mistake, you can subpoena the court to make amends. If not, you might have to appeal the court’s initial ruling at an Appellate Court.

In any case, if the CETV has been under-valued, you will be paid remittance in subsequent payments. If it has been over-valued, you will be asked to pay your former partner's remittance.  

What’s The Difference Between Scotland And The Rest Of The United Kingdom In Pension Plans?

Scottish courts are a bit more forthcoming with the pension fund member. 

While in most United Kingdom jurisdictions, the total pension pot includes pension schemes predating the marriage, Scottish courts do not consider any schemes, values, or annuities that were applied for before the marriage took place.

This usually means that the CETV value issued by Scottish courts is less than those issued by English, Welsh, and Northern Ireland courts.

What Should You Do Next?

Here’s something you need to know about a pension sharing order – the recipient is not entitled to pension benefits of the transferor until the transferor themselves are eligible to receive their pension. 

Simply put, you can not ask the court to issue your transfer value amount from a pension pot that isn’t being received by the pension fund member – irrespective of age.

But once you start receiving the transfer value limit, your next steps should be to ensure that the CETV is equitable – note the use of the word equitable instead of equal; pension transfer values can be offset either entirely or partially by other items in the matrimonial pot. 

Next, you’ll need to consider setting up a Self-Issued Pension Plan for yourself.

In some cases, the pension fund member will also have an SIPP in which case you’re entitled to a pension lump sum on retirement. You can also ask for the transfer value to be credited to any new or previous pension plans of your own. 

The Bottomline

A pension share order is a financial agreement between divorcing parties with the involvement of the court 

A pension share order ascribes a cash value, the CETV to a pension fund member's pension pot, and then calculates a transfer value to be received by their former partner. 

The whole process can take up to four months in most courts – less in Scotland.

It provides a clean break and lets partners move on without any further financial squabbles. However, there are other options to explore if a PSO doesn’t seem right for you.


What Are The Pros and Cons Of A Pension Sharing Order?

There are a number of pros and cons to pension sharing orders, which you should consider before making a decision.


Pros:


  • You will each have your own pension pot, which can be used to provide an income in retirement.
  • A pension sharing order can be tailored to meet your specific needs and circumstances.
  • A pension sharing order can be reversed if your circumstances change.
  • It provides a clean break (link)


Cons:


  • A pension sharing order can be complex and time-consuming to set up.
  • You will need to pay for legal advice to get a pension sharing order.
  • If you have a defined benefit pension, it may not be possible to divide it using a pension sharing order.