What are your pension sharing or splitting rights on divorce?

The main rules and procedures governing divorce in England and Wales are laid down in the Matrimonial Causes Act 1973 and the Family Procedure Rules 2010. In Scotland, the main legislation governing the financial aspects of divorce is the Family Law (Scotland) Act 1985. In both, the options for dealing with pension rights on dissolution of a civil partnership are the same as apply on divorce.

There are four main ways of dealing with any pension rights (including pension splitting or sharing rights) on divorce (these are not mandatary):

1. One of the parties could pay a lump sum payment to the other

2. The rights can be counteracted against other assets of the divorcing parties

3. The rights can be subject to an earmarking (also known as “Pension Attachment”) order

4. The rights can be subject to a pension splitting or sharing order

5. It is important to note that ‘earmarking’ or splitting / sharing of UK pension rights cannot be ordered by an overseas court (even though a settlement made by an overseas court may purport to do so). Conversely, where an individual has pension benefits that are held overseas, it is not possible for a UK court to make a pension sharing or earmarking order against those benefits.

Earmarking

Earmarking has been available to divorcing parties since 1 July 1996.

When the pension rights come into payment, a percentage as defined in the earmarking order is paid direct to the former spouse.

The pension holder remains liable for income tax on the whole pension; the ex-spouse has no liability at all.

In England and Wales, both pensions and lump sums (on retirement or death) can be earmarked. Under Scottish law, only lump sums can be earmarked.

There can be a number of problems when attempting an earmarking approach, these are as follows:

Uncertainty can rise about the eventual payment of the benefits, this could be due to; if the pension scheme holder dies before retiring, or if the ex-spouse marries/ forms a civil partnership then any earmarking order (not including lump sum death benefits) will cease to apply.

Earmarked payments due to a divorce, will not start until the member retires, this could be a problem if the ex-spouse is older than the pension holder or if the pension holder delays the retirement date.

If the pension holder retires early on a reduced pension, then the earmarked payments will also be reduced, this would result in the ex-spouse yielding lower annual income that they might have expected.

The payments from earmarking will cease on the members death, this would leave the ex-spouse without that income for the last years of life, which is often when it is needed the most.

Earmarking does not fit with the clean-break approach to divorce/dissolution which is generally favoured by law and courts in the UK.

Pensions sharing or splitting on divorce

The pension sharing or splitting on divorce option was introduced from 1 December 2000.

The pension holders pension rights are divided at the time of the divorce: a pension sharing or spitting order specifies a certain percentage (in Scotland, an amount or percentage) which will be removed and secured for the ex-spouse as part of the settlement agreement.

The rights so secured form immediate or deferred benefits for the ex-spouse, independent from the pension holders remaining rights.

However, the trustees of the pension holder’s scheme may choose to offer an internal transfer within the scheme, where it would be treated rather like any other pension or deferred pension.

In this case, the ex-spouse will have the choice of whether to remain in the member’s scheme or to transfer out.

In England and Wales, a pension splitting or sharing order on divorce will be accompanied by a pension sharing annex (Form P1) giving details of the member, the ex-spouse, the pension scheme to which the annex relates, the percentage of the benefits to be shared and the date on which the sharing order takes effect.

This must be sent to the pension scheme trustees within seven days.

Since – unlike earmarking – pension splitting / sharing on divorce does fit well with the clean-break principle, and does secure pension rights for the ex-spouse at the time of the divorce, it is more widely used than earmarking.

However, lump sum payments and offsetting also have their advantages, and will undoubtedly continue to be used in many cases.

Do you need advice based on pension splitting or sharing on divorce?

If you are seeking advice or have any questions related to pensions splitting or sharing due to a divorce then fill out our form on the contact us page and one of our pension adviser will be in touch with you.