There has been a growing awareness of the issues surrounding pension sharing on divorce in recent years, but many people still find it a difficult area to address.
A Pension Sharing Order is one way to make formal arrangements to divide pension savings after divorce, giving each party a fair share of the marital retirement pot.
But what is a Pension Sharing Order and when is it appropriate to get one? In this guide from Marcia Mediation’s financial mediation team, we’ll cover everything you need to know about this important legal agreement.
A lot of people think of their pension savings as untouchable until retirement. While that is true to an extent, it’s not a reason to ignore those funds during divorce.
If one partner in the marriage has substantial retirement savings – such as a workplace pension – and the other does not, then the pension holder is at a significant advantage going into the divorce process.
To be fair to both parties, there should be some kind of balancing payment made to offset the value of the pension against the remaining marital assets. That’s where tools like Pension Sharing Orders can help you to formalise your arrangements.
A Pension Sharing Order is one way to make a formal agreement about how to divide the value of the retirement pot between both parties during the divorce process.
Put simply, it is an agreement to transfer a percentage of one partner’s pension – anything up to 100% – into a separate pension in the other party’s name.
Pension sharing on divorce allows the value of retirement savings to form part of the financial settlement. It’s also a key element in allowing both parties to make a clean break, by fully and fairly dividing the marital finances without any lingering obligations.
Pensions are major marital assets, often worth tens of thousands of pounds or more. If the equivalent funds were held in a savings account or ISA, they would almost certainly form part of the financial settlement negotiations during divorce.
Historically, pensions have often been overlooked during divorce. Because the funds are locked away until retirement, many couples either didn’t realise they could form part of the divorce settlement, or simply didn’t think of their pension savings in the same way as other assets.
A campaign in the 2010s by Baroness Ros Altmann helped to raise awareness of the right to pension sharing on divorce, which was introduced in 2000. Pension Sharing Orders are the legal document that enforces this right.
During a marriage or civil partnership, you work together to build your family home, look after your children and make preparations for a comfortable retirement.
That can mean one partner goes out to work, while the other stays at home and takes on more of the parental responsibilities. Even in marriages where you both work, one partner may earn substantially more than the other.
Fairness in divorce isn’t always about keeping every penny you earned yourself – it’s a more complex balance of giving each party what they need to live comfortably, and a reasonable share of whatever is left.
Pensions are a huge part of that. They’re often the biggest marital asset after your house, and it would be unreasonable to leave a non-working partner with nothing saved for their retirement.
A Pension Sharing Order is usually not something you agree in isolation. It forms part of the overall financial settlement of your divorce. That’s why it’s not always a 50% split – it can be offset using other marital assets.
The process for getting a Pension Sharing Order begins with getting a fair valuation of your pension savings. This is often referred to as a CETV, or Cash Equivalent Transfer Value.
Once you know how much your pension will be worth to you in retirement, you can decide to split it 50/50, or for one partner to receive more.
You can include a Pension Sharing Order as part of an amicably agreed Consent Order, which the court can then rubber-stamp to make it official.
There are two ways to transfer pensions into separate pots in order to comply with a Pension Sharing Order:
Not all pension schemes allow you to transfer funds in either of these ways. As such, you may need to consider one of the following alternatives to pension sharing.
Pension sharing is just one of the ways you can account for the value of your retirement savings during divorce.
Where it is not possible to transfer funds into the other person’s name, or there is some other reason why pension sharing is not preferable, there are several alternatives to use instead:
The CETV of the pension is considered as a marital asset like any other, and is allocated to the current pension holder. The other party receives an equivalent value of other marital assets, e.g. the house, cash savings and/or stock market investments.
Both parties receive their fair share of the marital estate at the time of divorce, with no lasting obligations to one another – this allows a clean break with no transfer of pension funds.
‘Earmarking’ or ‘attachment orders’ are a way to keep pension funds where they are, but create a legal obligation for the pension holder to pay a portion to their ex-spouse once they start to claim a payout from the pension.
This again allows funds to stay where they are, without anyone losing out on their expected retirement income. It’s not a clean break, but it can work well in amicable separations.
With so many options for pension sharing on divorce, it’s important to understand the implications of each route. Marcia Mediation’s financial mediators can help you to do that, with practical, positive guidance that treats everyone fairly.
Remember, there is no need to enter into lengthy and costly litigation. You can agree the terms of your divorce between yourselves, with a mediator’s help. The settlement you reach can be approved in court, to make it legally binding without running up as many legal fees.
Deciding if a Pension Sharing Order is right for you can depend on the factors mentioned above, crucially whether or not you can transfer funds out of the existing pension vehicle, or whether offsetting/earmarking are the only available methods.
There is also an element of personal preference. You might not want to move your pension savings out of a good scheme, or split them up. Keep in mind that just because you are on good terms with your ex-partner now, that might not remain the case forever.
But if you believe you can remain amicable with your ex-spouse going forward, an alternative like earmarking might be suitable when a completely clean break is not required.
Professional advice is an important part of making a decision about the future of your pension savings after divorce. This can include speaking to a divorce lawyer, a pension adviser, or a financial mediator.
Remember that not all family mediators have the specialist knowledge and experience needed to help you with financial decisions. Marcia Mediation’s team has that expertise, which allows us to provide a variety of financial mediation services.
The order of events of getting a Pension Sharing Order makes it even more important to keep negotiations amicable where possible. It’s generally preferable to agree the division of marital finances and assets before your divorce is finalised (i.e. before the court grants your Final Order, previously called a Decree Absolute).
However, you can’t get a Pension Sharing Order until after your Final Order has been issued. By working with financial mediators throughout your divorce, you can make sure that your pension arrangements are agreed in advance, ready to get them rubber-stamped once your divorce comes through.
Let’s summarise the key points we’ve learned in this guide:
A Pension Sharing Order is a formal, court-approved agreement to transfer some of one party’s pension savings into the other party’s name as part of the divorce process.
Pension Sharing Orders help to ensure the fair division of marital assets during divorce, while enabling both parties to make a clean break going forward.
A percentage of one party’s retirement savings (anything up to 100%) is transferred into the other party’s name.
This can be:
Not all schemes allow both of the above options. Some schemes do not allow transfers at all, in which case an alternative method will be needed.
The main alternatives to Pension Sharing Orders are:
Like pension sharing, pension offsetting allows a clean break. Earmarking does not, as you will need to have some contact during retirement to make the necessary payments.
Pension Sharing Orders can be part of your Consent Order. It’s a good idea to agree your plans for your pension pot before finalising your divorce – like other aspects of your marital finances.
However, you can’t get your Pension Sharing Order approved in court until your divorce is finalised. Therefore, you should aim to complete negotiations before your Final Order is approved, so you can get your Pension Sharing Order in place as soon as possible.
It’s best to be amicable throughout your divorce negotiations, whether that’s who gets the house, visitation rights with your children, or the division of your retirement savings.
When everyone is pragmatic about dividing marital assets fairly, the process is much faster, less stressful, and less costly in terms of solicitor and court fees.
A divorce mediator can guide you through much of the process, so that all the court needs to do is approve the arrangements you have already made between yourselves.
Marcia Mediation’s financial mediation expertise means you don’t need to look anywhere else for help when deciding on your Pension Sharing Order and other monetary decisions.
Contact us today to start the conversation, and we’ll work hard to help you and your spouse divorce with dignity, while ensuring that everyone receives their fair share of future income.
If you have any questions, call us on 0330 236 7450 or fill out this form
