Splitting Up? Who Gets the Pension? A Short Guide on What Could Happen

So, for example, if the husband was a member of a pension scheme and he was expecting a pension of (say) £4000 a year, this would mean that he might be able to afford a little bit more spousal maintenance than someone who didn’t have such a pension. Or, the wife might get a larger share of the capital assets to take account of the husband's pension (known as “offsetting”). It was all very ‘finger in the wind’ stuff and not very scientific or indeed fair!

Pension Earmarking Orders were introduced under the Pensions Act 1995. They essentially required the trustees of your pension scheme to divert part of a pension (either pension income and/or a lump sum) already being paid to the member’s former husband or wife. There were several problems with this arrangement.

First, it depends on the pension coming into payment in the first place. This can be some time in the future if the couple are in their 30’s when they divorce, and no one knows just how much the pension will be so far ahead of it being paid. The woman also has to wait until the ex-husband actually retires for her Earmarking Order pension to kick in. Second, the pension will stop if the former spouse recipient remarries. Third, it doesn’t really provide the ‘clean break’ that is the basis for so many divorces.

Not surprisingly therefore, Earmarking Orders are not used very much, especially with the advent of Pension Sharing Orders, which have proved much, much more popular (see below)!!

At the very end of 2000, a new form of order was introduced, the Pension Sharing Order. Instead of dividing the pension when it comes into payment, these orders split the pension (not necessarily 50:50; any percentage share is possible, including the transfer of the whole pension, which can be useful where there is more than one pension) at the time of the divorce itself.

In theory this should be pretty simple. The scheme member who is getting divorced has his or her pension reduced by what is called the ‘pension debit’ amount. This in turn then becomes a ‘pension credit’ for the former spouse, which can be used either to provide benefits in the existing scheme from which it came or, more usually, it can be transferred to another pension scheme or arrangement.

Despite the simplicity of the theory, in practice, Pension Sharing Orders can be very complicated to implement and reams of legislation has to be drafted or amended to take account of Pension Sharing Orders. Without going into a lot of very boring legal detail, the issues that can arise include:

• Can a scheme insist on transferring the former spouse’s pension credit? Many schemes don’t like having what can sometimes be very small benefits hanging around. They are expensive to administer for one thing. On the other hand, it may be difficult to find another arrangement that will accept small benefits too and certainly insurance companies often lay down a minimum amount before accepting them.
• If benefits do remain within the scheme, what form should they take? Just a basic pension? What about death benefits? Or benefits for dependants? These are very normal benefits to be provided for ‘full members’ of schemes, but do they have to be provided for ex-spouse members?
• What if both spouses are members of the same scheme? This is not unusual in some industries and some parts of the country. How then do the trustees divvy up the ‘debits’ or ‘credits’? It can all get very messy.
• The fees charged by the pension scheme to implement the Pension Sharing Order can be considerable. This may be avoided if there are several pension schemes, enabling 100 percent pension share/s to be made in respect of smaller schemes.

You start to see the problem I am sure.

Finally, perhaps, a little word on when pension sharing might apply and to what sort of pensions.

Basically, the provisions apply to any divorce petition issued after 1 December 2000. It can also be used (but only where both parties agree) in respect of an earlier divorce petition - this is quite complicated and involves rescission of the pre-December 2000 petition and filing a new one. As stated earlier, both parties have to agree - a colleague in my firm acted for the husband in one of the reported cases which established this point.

Pension sharing is not obligatory of course. It is just one weapon in the discretionary armour of the court when dealing with a divorce. It's particularly useful with longer marriages where, unless there is some unusual circumstance, it would be usual to divide the cash and pension assets equally between the spouses. Pension sharing is also available as a remedy in nullity proceedings, but not judicial separation proceedings. And, of course, it also applies to the dissolution of Civil Partnerships begun on or after 4 December 2006.

It applies to the following types of pension arrangement:

• Occupational pension schemes (defined benefit/defined contribution)
• Personal pension schemes (including Group Personal Pensions)
• Retirement annuity contracts (including pensions which have been bought with an insurance company)

Pension sharing applies whether you are an active member of a scheme, whether you have left an employer but still have pension benefits remaining with that employers’ scheme or if you are a pensioner.

If you ever find yourself in the situation where you are getting divorced, make sure that you get specialist advice on your pension arrangements. Not all divorce lawyers are expert at pension law – why should they be? But there are specialist pension lawyers around who can work with your divorce lawyers to see you through the maze. Take advice and protect your rights.

Jennie Kreser, Partner (Pensions): jik@silvermansherliker.co.uk
Maeve O’Higgins, Partner (Family): moh@silvermansherliker.co.uk

Or call +44 (0)20 7749 2700.