Pensions and divorce

A guide for information

Contents

History 3

Matrimonial Causes Act 1973 3

Matrimonial Causes (Northern Ireland) Order 1978 3

Family Law (Scotland) Act 1985 3

Pensions Act 1995 3

Welfare Reform & Pensions Act 1999 3

Divorce Dissolution & Separation Act 2020 3

The options for pensions 4

Offsetting 4

Attachment orders 4

Impact of pensions flexibility on attachment/

earmarking orders 5

Considerations when opting for attachment/

earmarking orders 5

Pension sharing 6

The pension sharing process 6

Tax aspects 7

Pension sharing effects on the member 7

Pension sharing effects on the ex-spouse 7

Protections and divorce 8

Impact of April 2015 pensions legislation

changes on divorce 8

Offsetting 8

Earmarking 8

Pension sharing – your questions

answered 9

What happens once a pension sharing order is

finalised? 9

What is the next stage? 9

How is the value of the pension

credit calculated? 9

What options are available to the ex-spouse for

a pension credit? 9

Can the ex-spouse join the member’s

occupational scheme of which the client is a

member? 10

What if the ex-spouse does not make a decision

about their pension credit? 10

What if the policy is already subject to an

earmarking/attachment order? 10

What happens if an insured pension policy that

is subject to a pension share is invested in a

With-Profits fund? 10

Can the pension provider make any separate

charges for implementing pension sharing orders? 10

Summary 11

History

Matrimonial Causes Act 1973

This Act gave courts in England and Wales the power to

take the value of personal and occupational pensions into

account when settling the matrimonial estate although

this was not compulsory.

Matrimonial Causes (Northern Ireland)

Order 1978

This Order gave similar provisions to courts in Northern

Ireland as those introduced above.

Family Law (Scotland) Act 1985

Historically, in Scotland, the value of pension benefits

could be offset as part of the financial settlement, though

the ex-spouse had no direct access to the pension. (There

was no compulsion to allow for the pension value in

sharing the assets for England, Wales or Northern Ireland.)

The 1985 Act set out the principles to be applied, sharing

the value of matrimonial property and factors to be taken

into account.

Only assets accrued during the marriage (or civil

partnership) are taken into account in Scotland (whereas

all assets are taken into account elsewhere in the UK).

Pensions Act 1995

Prior to the Pensions Act 1995, the only way of

taking account of the value of pension benefits was

by ‘offsetting’.

This Act gave the courts in England, Wales, Scotland

and Northern Ireland the power to earmark pensions.

For divorces petitioned (started) on or after:

• 1 July 1996 (England and Wales)

• 19 August 1996 (Scotland) or

• 10 August 1996 (Northern Ireland).

The Act made it compulsory for courts to take pension

rights into account when determining the value of the

matrimonial estate.

The Act also applies in cases of civil partnership

dissolution and nullity proceedings.

Welfare Reform & Pensions Act 1999

Brought in pension sharing in divorce and nullity of

marriage cases where the petition was filed with the court

on or after 1 December 2000.

Earmarking (now termed attachment order in England and

Wales) and offsetting are available for those who do not

want to use Pension Sharing.

Divorce Dissolution & Separation Act 2020

This is an Act of Parliament of the United Kingdom which

removes the requirement to establish the facts of divorce

and permits a no-fault divorce.

This Act only applies in England & Wales.

To help simplify the explanations, assume that

• the ‘ex-spouse’ includes ‘ex-civil partner’, and

• the member is male and the ex-spouse

is female.

There are differences between the law for

Scotland and for the rest of the UK and these

are pointed out where relevant.

In England and Wales in accordance with the

Marriage (Same Sex Couples) Act 2013 and

in Scotland in accordance with The Marriage

and Civil Partnership (Scotland) Act 2014,

same-sex marriages are treated as the same

as opposite-sex marriages for the purposes

of divorce and pensions. In Northern Ireland,

same-sex marriages are treated as the same as

civil partnerships.

The options for pensions

Offsetting

This involves getting the value (usually the cash equivalent

or transfer value) of the pension benefits as at the date

of divorce (or date of official separation in Scotland). This

value would then be included in the total value of the

matrimonial estate to be divided on divorce.

As the courts are unable to compel the pension holder to

set aside any of his or her pension benefit for his or her

ex-spouse, the courts take account of the value of the

pension by offsetting this against other assets. Effectively,

the ex-spouse gets another asset, or share of another

asset (up to the appropriate value of the share of the

pension) instead of the share of the pension. Normally,

this involves the ex-spouse getting a larger share of the

matrimonial home to compensate for the pension share.

Example:

Angus and Agnes are divorcing. Angus has a personal

pension worth £150,000 and the family home is worth

£200,000 (no mortgage). There are no other assets

(or liabilities).

Therefore the total assets are worth £350,000.

If the courts awarded each of them a settlement of 50%,

this would result in a value of £175,000 for each of them:

• Agnes would get £175,000 of the equity in the

home and

• Angus would keep his pension (valued at £150,000)

and get £25,000 of the equity in the home.

Attachment orders

An attachment order, or, in Scotland an earmarking order,

is effectively deferred maintenance.

The sequence of events leading to an earmarking or

attachment order is as follows:

• The court instructs the member to get a valuation of his

pension benefits.

• In Scotland, this would be the Cash Equivalent Transfer

Value (CETV) of the benefits as at the date of petition or,

if earlier, when the divorcing couple separated. The court

usually only take into account benefits earned during

the marriage.

• Outside Scotland, the courts will use the same CETV

basis, but there will be no proportioning by for the

period of the marriage. This means that all pension

benefits, including those earned before marriage, are

taken into account (except any already earmarked from

an earlier divorce).

• The pension scheme provider/trustees must provide this

valuation within 3 months of the request.

• The court issues an order setting out the terms of the

attachment/earmarking. The provider/trustees can object

to the terms of an order within 14 days of its receipt. They

may want to object if the order states that the scheme/

provider is to arrange for the split, rather than the member

accessing the pension and passing on the attached/

earmarked payments to the ex-spouse.

• For divorces in England, Wales and Northern Ireland,

the court can direct that:

‒ A specified percentage of the pension benefits must

be paid to the ex-spouse when the member starts to

draw benefits. Prior to 1 December 2000, the Court

could specify a monetary amount although this option

is no longer available.

‒ The member may have to commute part of his

pension for the maximum lump sum available when

benefits are taken, and pay part of that lump sum to

his ex-spouse.

‒ A specified percentage of any lump sum death benefit

must be paid to the spouse in the event of the death of

the member before retirement.

• In Scotland, the court does not earmark the pension

income of the member. Only the tax-free cash sum and

lump sum death benefits would be earmarked.

• Administrator’s/trustees’ normal discretion on selection

of beneficiaries for death benefits can be over-ridden

by an attachment/earmarking order. The order can

compel the inclusion of the ex-spouse as a beneficiary

for any lump sum death benefit. This power does not

extend to the redirection of dependant’s pensions on the

member’s death.

• If the pension benefits are subsequently transferred, the

receiving scheme or provider must be given a copy of the

attachment/earmarking order by the transferring scheme.

The ex-spouse should be informed of the transfer within

21 days.

Impact of pensions flexibility on

attachment/earmarking orders

In divorce cases, or on dissolution of a civil partnership,

the courts may order that an attachment order is placed

on a person’s pension. The attachment order requires the

scheme administrator or pension provider to make certain

payments from the amount due to the individual.

Since the individual as a scheme member retains control of

the pension, under new flexibility to take pension savings

under pension flexibility introduced on 6 April 2015, this

might result in a former spouse or former civil partner

receiving less than they expect. For this reason a pension

providers, trustees and advisers need to notify a former

spouse or former civil partner.

Considerations when opting for

attachment/earmarking orders

Attachment/earmarking provides an avenue for an ex-

spouse, who may have no “own-right” pension provision,

to access the pension built up during the marriage, or in

England and Wales before the divorce. Unfortunately, the

provisions bring various disadvantages:

• Attachment/earmarking orders automatically lapse on

remarriage of the ex-spouse, in relation to any periodical

pension payments due. Any tax free retirement lump

sum earmarked when the member takes benefits would

still be payable to the ex-spouse unless the Court Order

specified otherwise. Similarly attachment/earmarking

orders automatically lapse on the member’s death,

except where the Order covered any lump sum death

benefit to be paid to the ex-spouse. In these cases the

terms of the Order may still apply on the member’s

death, even if the pension is already in payment

depending on the terms of the Order.

• Subject to normal HM Revenue & Customs rules, the

member can opt to take benefits whenever he decides.

This could result in delaying taking benefits as long as

possible in the hope that the ex-spouse will remarry or

die first.

• The ex-spouse has no control over the investment of

the pension fund. The member could deliberately invest

in poorly performing funds to diminish the value of

the fund.

• Contracted-out rights cannot be attached/earmarked

(but can be used in the value for offsetting purposes).

• The pension is taxed as the member’s income and

attached/earmarked payments are paid after tax. For

this reason, pension providers are likely to require the

Order to specify that the member (not the provider) is

responsible for the actual payments to the ex-spouse.

This may, conveniently, be arranged through a joint

bank account with appropriate ongoing payments to

individual accounts.

• The method of valuation for divorces outside Scotland

could have serious consequences for those who marry

late in their working life or for those who have been

divorced more than once.

• Attachment/earmarking does not allow a clean

break divorce.

Pension sharing

The aim of pension sharing is to separate the ex-spouse’s

pension entitlement from the member’s pension so that

there’s a clean break.

Pension sharing is not compulsory. It is one of three

options available to the courts settling benefits in respect

of pension entitlement where the couple is unable to reach

an agreement.

Couples divorcing in Scotland can reach a pension share

agreement by a court order or by completing a registered

Minutes of Agreement. However, in both England and

Wales, this can be achieved only by a court order.

The pension sharing process

• The Court instructs the member to get a valuation of

his pension benefits (a Cash Equivalent Transfer Value,

or CETV) of the benefits as at the date of petition or, if

earlier, when the divorcing couple officially separated

along with certain other information about his benefits.

If a CETV has been provided within the last 12 months,

there’s no need to get a more up-to-date figure.

• The provider or trustees of the pension scheme must

supply the valuation within 3 months (or no later than

6 weeks before the divorce hearing if the provider/

trustees had prior notice of the impending hearing). If

there is no need to get an up-to-date CETV, the scheme

must provide the requested information within a month.

• Contracted-out rights and former contracted-out rights

may be shared.

• The Court will decide how much of the pension rights

should be allocated to the ex-spouse and the member’s

pension rights will be reduced by a corresponding

amount. This reduction is known as a “Pension Debit”.

• In Scotland, the order may instruct a monetary amount

or a percentage of the pension benefit to be subject to

a debit. Outside Scotland, the debit amount must be a

percentage. (This is particularly important given that the

value of the pensions may have changed substantially

between the point of separation and the date that the

pension debit is actioned).

• The rights allocated to the ex-spouse are known as a

“Pension Credit”.

• The existing pension scheme can choose to allow

the ex-spouse to join the scheme in their own right

OR to take the transfer value to another registered

pension scheme. In practice, it’s likely that most

schemes will allow only a transfer out. There are two

exception categories:

‒ where the member’s pension is being paid through a

guaranteed pension annuity with a pension provider,

the pension provider may insist on an annuity with

that provider OR

‒ where assets cannot be readily cashed in, the scheme

may decide that the ex-spouse needs to become a

member of the scheme, in their own name. This would

apply in, for example, unfunded schemes, public sector

schemes or, where the assets are in property such as

in SIPPs/SSASs.

The options for pensions continued

Pension Schemes are allowed to pass on the costs of

implementing Pension Sharing orders to divorcing couples.

The Regulations do not specify limits on the charges, but,

if the scheme requires charges to be paid, the scheme

must notify the couple of these charges before the order/

agreement is made.

Once the pension provider/trustees get a Pension

Sharing order:

• they have 3 weeks from receipt to appeal against

any order/agreement.

• they can delay the start of the implementation period

until charges are paid or whilst relevant information is

outstanding (or whilst an appeal is being decided).

• they have 4 months to implement the Pension Sharing

Order. This implementation period involves discharging

the Pension Debit/Credit by way of an internal or

external transfer.

Tax aspects

The changes to pensions legislation from 6 April 2006

affected the treatment of pension entitlement on divorce.

Before then, the old rules (such as the maximum benefit

rules for occupational schemes) needed different

considerations, but are historical now, so not covered here.

The impact of the tax rules depends on the option chosen,

or agreed.

Offsetting

Where “Offsetting” applies the sharing arrangements are

outside the pension scheme.

Attachment Orders/Earmarking

Any tax free cash made through the order to the ex-spouse,

is assessable against the member’s Lump Sum Allowance

(LSA) and Lump Sum and Death Benefit Allowance

(LSDBA) and any pension income paid to the ex-spouse is

assessed against the member’s income tax liability. This is

despite the fact that a portion of the benefits will be paid to

the ex-spouse.

Pension sharing effects on the member

• If the member is subject to a pension debit and

has registered for Primary Protection, the Primary

Protection factor will be reduced to take into account the

reduced pension.

• If the member has Individual Protection 2014 (IP14)

or Individual Protection 2016 (IP16) the appropriate

amount used for the protected value is reduced by 5%

for each complete tax year between 5 April 2014 (IP14)

or 5 April 2016 (IP16) and the transfer day. This could

result in IP14 or IP16 being lost in full.

Pension sharing effects on the ex-spouse

• A pension credit will not be treated as a contribution

when checking against the Annual Allowance.

• If the ex-spouse has a pre-commencement credit factor

awarded in respect of pension sharing order made

before 6 April 2006, both their LSA and LSDBA will be

increased by pre-commencement pension credit factor.

• If the ex-spouse has an enhancement factor in respect

of a pension credit awarded after 5 April 2006 their

LSDBA will be increased by the enhancement factor. If

the ex-spouse has not yet applied for an enhancement

factor in respect of previously crystallised pension rights

they have until 5 April 2025 to apply for this.

• Once the ex-spouse has received the pension credit,

they have control over the investment and timing

of when benefits are taken (that is, subject to the

normal rules).

• Pensions in payment which originated from a pension

credit are taxed as the individual’s own income, (the ex-

spouse pays the tax on the part they have been given)

Protections and divorce

There are some Lifetime Allowance (LTA) protections that

can impact on the decisions made during divorce.

Impact of April 2015 pensions legislation

changes on divorce

Pension flexibility, introduced in April 2015, raises further

issues around how pensions are considered on divorce.

This affects all three options (offsetting, attaching/

earmarking and pension splitting).

Although pensions legislation has changed, other relevant

parts of legislation (and practice) in relation to divorce

has not.

It’s too soon for any case law covering interaction between

the new pension flexibility and divorce, but legal challenge

could come. In the meantime, there should be even more

focus on ensuring that Court Orders reflect the intended

result, in a way that cannot be frustrated through pensions

flexibility. Additional issues include:

Offsetting

Currently pensions are not usually valued on a pound for

pound basis with other assets, because of the uncertainty

around the true eventual value of the pension. However, for

those ‘divorcees’ who are over 55 (57 from 6 April 2028,

unless they have a protected pension age), there is now

total access to defined contribution pension funds. This

may lead to value parity with other assets. If so, the tax and

future contribution issues surrounding accessing flexibility

need to be addressed in the settlement discussions.

Earmarking

Pension flexibility may have a significant impact on the

application of earmarking orders – potentially leaving

scope to circumvent the requirements set out in the order,

unless the details in the order are very specific.

For example, the member (the pension-owning individual)

may be able to avoid the payment of the income as set out

in the earmarking order. This could be done by choosing to

take some or all benefits as cash lump sums, also known

as an uncrystallised funds pension lump sum (UFPLS). If

the earmarking order doesn’t specify exactly when and

how benefits must be taken, and/or doesn’t specify “tax-

free lump” or ‘pension commencement lump sum (PCLS)’,

the order can be circumvented by taking the UFPLS

(which isn’t a PCLS). Then, if there are no pension funds

left to crystallise, there’s no income left to be covered by

an income earmarking order.

Also (although not strictly an issue created by pensions

flexibility) historically, the assumption was probably that

pension income covered in an attachment/earmarking order

would be regular guaranteed income for life payments, also

known as an annuity. The member could go into flexible

income, also known as drawdown and take no income or a

minimal amount. In addition, legislation, post 2015, allows

annuity income to reduce.

All this means that the original intention behind an

attachment/earmarking order could be frustrated.

The options for pensions continued

Pension sharing – your questions answered

Post April 2015, the ex-spouse may prefer to have cash

rather than a share of a pension fund. If the member

is over 55 (57 from 6 April 2028, unless they have a

protected pension age), this is possible, even if the

ex-spouse is much younger, as the right to access the

pension fund is linked to the member’s age.

The courts may decide that a cash lump sum, or a

series of cash lump sums, should be paid instead of

pension sharing. However, that could result in serious

tax implications for the member and restrict tax relief on

future contributions (because of the Money Purchase

Annual Allowance).

All of this requires detailed financial advice and could lead

to legal challenges of existing Orders, further expense,

delay and frustration for some.

What happens once a pension sharing

order is finalised?

To enable us to take action for the pension sharing, we

need certain information from the ex-spouse and copy

documentation for the divorce. In broad terms details

required are:

• For the ex-spouse, full name (and details of all previous

names used by that person), date of birth and National

Insurance Number.

• Copy of the final pension sharing order.

• Copy divorce papers including Decree Absolute / Final

Order. In Scotland there is a one stage divorce decree,

called a decree of divorce (or Decree Nisi / Conditional

Order). It is also possible to finalise pension sharing in

Scotland by the completion of Minutes of Agreement.

• Confirmation there is no appeal pending on the pension

sharing order.

The provider has 4 months (known as the “implementation

period”) from the time we receive all the necessary

documentation to implement the terms of the pension

sharing order.

What is the next stage?

Once the provider has all the documentation and

information required pension credit can be released.

Following payment of the pension credit, the member and

ex-spouse will receive a discharge notice confirming the

amounts involved and the valuation date for the CETV –

see next question.

How is the value of the pension

credit calculated?

The pension credit share is based on a CETV of the

member’s policy or scheme benefits. Once the pension

share is agreed by the court, this is applied to an updated

CETV to obtain the value of the pension credit. The

eventual CETV may be more or less than the original

CETV valuation.

The legislation allows the pension arrangement’s

administrator to decide the valuation day for actual

implementation of the pension share within the

implementation period.

Note: Any benefit earned or contributions paid after

the date of the Court Order should be excluded from

the valuation.

What options are available to the ex-

spouse for a pension credit?

To help ensure a clean break the ex-spouse will probably

prefer to transfer the pension credit to another plan:

• Transfer to a personal or stakeholder pension in their

own name.

• Transfer to a pension scheme of which the ex-spouse is

already a member, but only if the scheme rules allow.

Before making any decision on what to do with a pension

credit, we would recommend that financial advice is taken.

Can the ex-spouse join the member’s

occupational scheme of which the client

is a member?

Membership of the client’s existing Prudential occupational

scheme will not normally be offered to the ex-spouse.

Even if the ex-spouse is an existing member – the pension

credit cannot remain in the scheme.

What if the ex-spouse does not make a

decision about their pension credit?

We would normally expect the ex-spouse to want to

make a decision about their pension credit soon after the

divorce is finalised. If we have not received a decision on

the receiving arrangement for the pension credit within

two months of the other requirements being met we will

contact the ex-spouse and their solicitor for a decision.

What if the policy is already subject to an

earmarking/attachment order?

Only one attachment/earmarking or pension sharing order

can be applied to any one policy or pension arrangement.

What happens if an insured pension

policy that is subject to a pension share is

invested in a With-Profits fund?

If the policy (or any part of the policy) to be disinvested

contains With-Profits funds, then money withdrawn

from this fund may be subject to an adjustment. This will

depend on the terms of the pension policy.

Can the pension provider make any

separate charges for implementing

pension sharing orders?

Details of any charges due to be paid must be provided

before a pension sharing order is implemented.

Pension sharing – your questions answered continued

Summary

To summarise, for divorce settlements, the following options are available:

Pension Offsetting

Where other assets of similar value are

substituted for the Pension Sharing

portion – this is likely to remain the

preferred choice for the majority

of couples.

Earmarking

The ex-spouse is allocated a portion of

the pension benefits once they come into

payment. The ex-spouse has no control

over them until the member decides to

take benefits – earmarking orders have

been relatively rare since the provisions

were introduced – it is likely to remain

that way, but may still be used for

death benefits.

Pension Sharing

A portion of the member’s pension

fund is deducted and allocated to the

ex-spouse, as their own pension fund.

The ex-spouse’s share can either stay

in the existing scheme or be transferred

to another registered (tax approved)

pension scheme.

Transferring to another scheme/

arrangement will probably be the

preferred choice (over earmarking).

However, the trustees may not allow

a transfer out if there are insufficient

realisable assets to facilitate a Pension

Sharing Transfer (for example, in a Small

Self Administered Scheme where assets

may not be readily encashable, or may be

cashable subject to investment penalties).

The information in this document is

based on our understanding, of current

taxation, legislation and HM Revenue &

Customs practice, all of which are liable

to change without notice.

The impact of taxation (and any tax relief)

depends on individual circumstances.

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