Pension Sharing on Divorce
Pension Sharing is the mechanism by which a pension is legally divided up into two separate pension arrangements following a divorce or the dissolution of a civil partnership. Once the share has been implemented, each party has individual ownership of their share of the divided pension and their respective benefit entitlements are completely independent of either each other. If one party subsequently dies or remarries post divorce this event will have no impact on the pension benefits of the other party.
Pension Sharing was introduced as one of the main elements of the Welfare Reform and Pension Act 1999 which and applies to all divorces where the petition is made after 1 December 2000. Pension sharing was extended to dissolution of civil partnerships for same sex couples following the introduction of the Civil Partnership Act 2004 which took effect from 5 December 2005.
A pension share involves transferring a portion of the pension to the ex-spouse, the amount of the transfer being referred to as the Pension Credit. The pension of the scheme member is reduced in value by way of a deduction made to the value of the residual benefits, which is referred to as the Pension Debit. As far as the pension scheme is concerned, pension sharing should be a cost neutral process, so the value of the benefits given up by the member should exactly match the value of the new benefits granted to the ex-spouse.
It should however be noted that “value of benefits” does not simply mean “amount of income”. For example, a pension scheme member may have a debit applied to their pension immediately post share as it is in payment whereas the ex-spouse, post pension share, may not be able to draw their pension credit benefits until they reach a minimum future age such as age 60. Similarly a pension scheme member may benefit from a spouse’s pension should they remarry post-divorce and pre-decease their new spouse, whereas the ex-spouse may not similarly benefit if they remarry post-divorce and pre-decease their new spouse.
There are two main types of pension share post-divorce. For clarity here I will describe a pension share of a husband’s pension to an ex-wife, however the process is the same if a wife’s pension is to be shared with an ex-husband or if pensions are to be shared between a same-sex couple on divorce:
An internal share is where the wife receives a pension share and is granted a pension entitlement in the same pension scheme of which the husband is member. The benefits granted to the wife are independent of those of the husband and will usually be payable to her from the time that she reaches the normal retirement age of the scheme in question, typically age 60 or 65, (or State Pension Age for the reformed Public Sector Pension Schemes introduced in around April 2015), though other ages may apply in some cases. Some schemes may allow the ex-spouse to draw credit pension benefits from the minimum pension age (currently age 55) with reduction for early payment whereas other schemes disallow this. Internal shares are most commonly seen in cases involving unfunded public sector schemes (e.g. NHS, Police, Civil Service, Teachers schemes), though these are sometimes an option for some private sector schemes.
An external share is where the wife receives a pension share but is required to invest this in an alternative pension arrangement of her choice. This may be a personal pension, or an occupational scheme which is able to take receipt of the pension credit. External shares are most commonly seen in cases involving funded private sector schemes cases (e.g. BP, Marks and Spencer, British Airways).
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