Pension sharing orders divide rights under a pension scheme so that each spouse has their own independent rights under that scheme or under two separate schemes.
The pension has to be capable of sharing and the rights themselves must be of a shareable kind.
The vast majority of pensions are shareable. The only significant exceptions likely to be encountered in practice are the basic state pension and a pension received as a dependant. Some overseas pensions may be more like investments and are not sharable
When considering pensions, the court exercises its discretion taking into account the section 25 factors which include, amongst other things, any benefits of the value of a pension the parties may lose due to the ending of the marriage.
Where a pension has been subject to a pension share in a previous marriage there is nothing to prevent the same pension being shared after a second divorce.
In the absence of agreement, to make an application for a financial order to include a pension sharing order, it is necessary to issue a formal court application. It is important to obtain full values of both parties’ pensions before making such an application. The valuation of pension rights and benefits is the cash equivalent value (CEV), the method of calculation of the value, the benefits included in the value, information as to whether an internal or external transfer will be offered and the costs associated with a pension sharing order. It can take up to 3 months for pension providers to provide this information. Unless the pension is already in payment, the pension provider will usually supply this detail once in any 12 month period free of charge. The valuation will need to be disclosed on each parties’ Form E within the court procedure.
The applicant must serve any application for a pension sharing order on the pension provider.
Where a pension sharing order is likely, the instruction of a pension expert is usual practice. Such a report will provide a range of % calculations to achieve equality taking into account a number of factors such as the values of the pensions, the parties’ gender, ages and expected retirement age both for the length of the marriage and the total pension accrual. The cost of such a report is usually borne between the parties equally.
A final financial order that contains a pension sharing order must contain a statement in the body of the order that there is provision for a pension sharing order referred to in an attached annex. Reference must be made on that annex as to who bears the cost of the pension implementation fees. When making a pension sharing order the court usually direct one of the parties’ legal representatives to send the documents to the pension provider which will include the sealed final financial order, the sealed final divorce order and the sealed pension sharing annex.
A pension sharing order takes effect from the date of the final divorce order or if later, 28 days from the pension sharing order being approved by the court. The actual date a pension sharing order takes effect is called the transfer day.
The pension provider must implement the pension sharing order within 4 months from the date that the order takes effect (i.e the transfer day) or if later, 4 months from the date that the pension provider receives the final divorce order and the final pension sharing order and annex.
Given the timings there is always the possibility that when implemented, a pension sharing order has a different effect to the one the court anticipates. Changes in investment rates or changes to the way in which the CEV is calculated may affect the CEV figure between transfer day and valuation day which is difficult to guard against.
A pension sharing order is implemented by creating a pension credit. The credit may be internal (if it stays in the pension scheme but becomes a separate fund) or it may be external (if it is paid to another scheme entirely). The effect of a pension sharing order is to create a pension credit member (the former spouse) and a pension debit member (the pension holder).
In many cases, assuming a pension sharing order is 50%, the pension created by an external transfer is less than the pension debit members pension in retirement for the following reasons:-
- Costs – annuity costs are often different and pension providers make charges on funds under management.
- The CEV on which the pension share is based may not reflect the true value of the pension benefits.
- Female pension credit members generally have a longer life expectancy than male members.
- Future accrual – the pension debit member is entitled to all the pension rights accrued after the pension share. The pension credit member does not have the same advantage.
Pension credit members should take independent financial advice before accepting an external pension share and about where to invest their pension credit.
An internal transfer is mandatory on most public service pension schemes, e.g., NHS, Police, Teachers, Armed Forces and Civil Service.
The pension scheme is not bound by the CEV at the date of the order. The CEV is recalculated on the day within the implementation period called the valuation day. The amount that is transferred by the pension sharing order is the specified percentage of relevant benefits on valuation day.
Relevant benefits are the benefits that the pension holder had in the scheme immediately before transfer day. The rights in the scheme are assessed at transfer day (the day the order takes effect) and the value of those rights is assessed at valuation day.
If a pension holder dies after transfer day their death does not affect the pension share which will have taken effect. If the pension holder dies before transfer day the pension share will fail.
Pensions are a complex area of family law but are one of the factors that are relevant in considering settlement proposals in respect of obtaining a final financial order.
If you have any queries in relation to financial matters following the breakdown of your marriage you should not hesitate to contact RJT Solicitors on 01257 228027 or rachel@rjtsolicitors.co.uk . We offer a free 30-minute consultation on all aspects of family law.
