Pension sharing orders on divorce

Why pensions matter in divorce

Pensions are frequently the most significant financial asset in a marriage — particularly for older couples where significant pension wealth has accumulated. Yet they’re often overlooked or undervalued in divorce negotiations.

The pension that provides one spouse with a comfortable retirement income may have a Cash Equivalent Transfer Value worth hundreds of thousands of pounds. Ignoring it — or not getting proper pension advice — can leave one spouse significantly worse off in retirement.

What is a pension sharing order?

A pension sharing order is a court order that transfers a percentage of one spouse’s pension to the other. It creates a pension credit for the receiving spouse — an entirely separate pension entitlement in their own name, rather than a share of the other spouse’s pension.

Pension sharing orders can be made against:

• Occupational pensions (final salary / defined benefit schemes)
• Personal pensions and SIPPs
• Stakeholder pensions
• Additional State Pension (SERPS/S2P) — but not the basic State Pension

How pension sharing works

Step 1: Obtain CETVs

Each party must obtain a Cash Equivalent Transfer Value (CETV) from each of their pension providers. This is the standard valuation used in divorce proceedings. CETVs are requested as part of completing Form E and can take several weeks to arrive — request them early.

Step 2: Consider the CETV in context

A CETV from a defined benefit (final salary) pension is often significantly lower than the true value of the pension — because it represents the transfer value, not the income the pension will generate. For valuable defined benefit pensions, a pension actuary may be needed to provide a more meaningful valuation.

Step 3: Decide on the percentage

The pension sharing order specifies a percentage of the pension to be transferred — not a specific amount. This is because pension values fluctuate. A 40% pension sharing order means 40% of the pension’s value at the time the order is implemented is transferred.

The percentage is negotiated as part of the overall financial settlement. There is no automatic 50/50 rule.

Step 4: The order is made

The pension sharing order is included in the financial remedy order (or consent order). It cannot take effect until after the final order in the divorce is pronounced.

Step 5: Implementation

Once the final order is made, the pension provider is sent a copy of the pension sharing order and implements it — typically within a few weeks to a few months, depending on the scheme. The receiving spouse then has their own separate pension entitlement.

Defined benefit (final salary) pensions

Defined benefit pensions — which pay a set income in retirement based on years of service and salary — present particular challenges in divorce:

• The CETV may significantly understate the real value
• The receiving spouse receives a pension credit that may be managed differently by the scheme
• Some public sector schemes have complex rules about pension sharing

If either spouse has a significant defined benefit pension (public sector, older workplace scheme), specialist pension advice from a pension actuary or pension on divorce expert (PODE) is strongly advisable.

Alternatives to pension sharing

Pension sharing is not the only way to deal with pensions on divorce. Alternatives include:

Pension offsetting — the pension is left intact, but the pension holder receives a smaller share of other assets (property, savings) to compensate the other party for giving up their pension share. This keeps pensions simpler but requires careful valuation.

Pension attachment (earmarking) — a proportion of the pension income or lump sum is paid to the former spouse when it becomes payable. This is less common than pension sharing, as it maintains a financial link between the parties.

The state pension

The basic State Pension and new State Pension cannot be shared by a pension sharing order. However:

• Married couples and civil partners divorcing before April 2016 could share Additional State Pension (SERPS/S2P)
• On divorce, spouses may be able to use each other’s National Insurance record to boost their own State Pension entitlement in some circumstances

Get advice on state pension implications — they can be significant for older divorcees.

Tax implications

The pension credit received by the non-pension-holder is treated as their own pension for tax purposes. It grows within the pension wrapper and is taxed as income when drawn.

There are no immediate income tax implications when the pension sharing order is implemented. Capital gains tax does not apply to pension sharing.

Getting specialist advice

Pension sharing on divorce is complex, and the stakes are high. Consider:

• A financial planner specialising in divorce (often called a Divorce Financial Analyst or CDFA) can model different scenarios
• A pension actuary or PODE (Pension on Divorce Expert) can provide a specialist report on defined benefit pension values
• Your family law solicitor can advise on how pension sharing fits into the overall financial settlement