In financial remedy cases family courts try to find an outcome that’s fair to both parties. This judicial approach in turn shapes the way private negotiations between spouses and their advisers play out. The division of pension pots often forms a big part of these discussions – partly because of the complexity involved in attaching an accurate value to an asset that has not yet materialised.
Achieving fairness doesn’t mean assets like pensions are divided equally. A range of factors will come into play before deciding how to divide the pension. There are three main ways a pension can be divided on divorce:
- Pension offsetting – The most common way to divide pensions involving a process whereby the right to receive a present or future pension benefit is exchanged for present capital (a larger share in the family home for example)
- Pension Attachment Order – PAOs used to be known as ‘earmarking’. These orders involve redirecting all or part of a person’s pension benefits to a former spouse
- Pension Sharing Order – PSOs involve an agreement or an order to divide the pension assets in specific shares at the time of divorce
In this article we’ll concentrate on PSOs: what are the pros and cons?
Can I Share My Pension Without Going To Court?
In most divorces where there’s a decision to share pension assets, couples will agree terms between themselves. But it’s still necessary to get the court’s approval – usually through a consent order. This is because most pension providers won’t make the necessary changes to the pension scheme without formal instructions from the court.
The PSO will usually stipulate that a percentage of one spouse’s pension is to be awarded to the other. The percentage given to one spouse is known as the pension credit. The proportion taken from the pension fund is referred to as the pension debt.
What are the advantages of a PSO?
A PSO is generally perceived to be a flexible way to deal with complex pensions on divorce. Some concrete advantages of the PSO are:
- It’s a clean break – once the order is put into effect the shared portion of the pension is legally transferred to the receiving spouse. This isn’t the case with some other approaches to pensions in divorce such as PAOs
- PSOs can help a recipient spouse who is about to retire build up a pension fund quickly when they would otherwise be unable to do so
- These orders assist in meeting the financial needs of the parties where the pension funds represent a disproportionate amount of the overall matrimonial pot
- They are final orders that can’t be changed if, for example a recipient spouse remarries. And because there’s a legal transfer of ownership the recipient spouse won’t be affected if the former spouse dies or remarries
- The receiving spouse can nominate beneficiaries of the fund in the event of his or her death
- There’s the ability to obtain some of the benefit of the pension from the age of 50. A recipient spouse can make this choice independently and can do so irrespective of whether their ex has retired or not
- The recipient of the pension share can choose whether to join the existing scheme independently or they can transfer the share out of the original scheme and place it in a preferred scheme
- A PSO can provide a working solution where there aren’t enough assets to offset the pension, or a spouse is keen to retain a large asset like the family home
What are the disadvantages?
PSOs might not work well if:
- The spouse in whose name the pension is has concerns about losing a proportion of their retirement income and a reduction in any future lump sum payable under the scheme
- The type of pension involved can’t be shared. This covers the state pension and pensions being paid to a spouse in their capacity of spouse, civil partner or dependant. It also covers pensions that are already subject to an attachment or sharing order
- If the recipient spouse wants to know precisely what they will receive on retirement. The PSO will award a percentage of the plan – not an exact monetary figure. Fluctuations in the value of the pension attributable to stock market volatility between the point of valuation and the point when the pension is shared (following finalisation of the divorce) means uncertainty as to what the final award will be
- Both spouses are happy with their existing pensions
Comment
In conclusion PSOs give couples a better chance of a clean financial break. They are also a flexible way to deal with your pension when you divorce. The fact that the order must be approved by a judge provides a valuable inbuilt safeguard. As we’ve seen however certain types of pensions can’t be shared, and if both spouses already have substantial pensions there may not be an incentive to obtain a PSO.