What is a pension sharing order?
An In Depth Explanation
Finalising a divorce settlement is hard enough, especially when you factor in selling the house and sorting the finances. Statistically, divorces are in the top three most stressful experiences you will have in life, alongside moving house and death. Having a pension order in place is just one less thing to worry about when it comes to talking money.
You may be wondering what a pension order is exactly and how it could work for you. In basic terms, a pension sharing order is a formal agreement of which your pensions are divided in a fair manner, to ensure both parties are looked after going forward. A brief example of this is if one party has given up their career to raise a family or stay at home, and therefore has either a small or no pension, from a previous job. A pension sharing order will then allow this person to have financial security in the future.
How a pension sharing order works
In December 2000, pension orders were legally introduced as a way of splitting up marital assets and can only be finalised through the court.
Pension sharing orders typically work in three ways:
- 1. Pension Sharing: The standard most common way. The pensions are calculated and worked out into fair percentages through the court, to determine the suitable finances for each party. The receiving party can either then become a member of the original pension scheme or it can be transferred to a new pension provider. It can also be added to a previous pension scheme if the receiving party already had one set up in place. This can be discussed depending on personal preference.
- 2. Earmarking: This type of method means that the pension doesn’t kick in for the receiving party until the active party starts to receive theirs. The pension itself is earmarked aside for a set period of time for a specific date.
- 3. Offsetting: If the party in ownership of the pension decides they would rather keep their full pension, then this is an option available. This method means the pension is offset against other assets of similar or the same value. This could be giving the receiving party the current marital property, or a lump sum cash payment if available.
It should be noted that a pension sharing order isn’t an automatic 50/50 split. The parties themselves can come to an agreement of percentages, but if this isn’t plain sailing (which sometimes it isn’t) then the court will calculate a fair finalisation. This will be done in a way to consider both current assets of each party, and how they will cope financially moving forward.
It should also be noted that for whatever reason necessary, a pension sharing order can also be reversed if need be. This will again, go through the courts, and will come at an additional charge.
For more information on the legal side of things, it’s definitely worth checking out the official regulations for pension sharing orders, so you are aware of what you’re entitled to or what you’re giving out. For more information click here.
This also goes into more detail on the types of pensions you can share, and the limitations of others.
Generally speaking, the majority of pensions are included when it comes to a sharing order.
This ranges from private, occupational, personal and as well as both registered and non-registered.
State pensions come under different regulations and can only be shared in certain circumstances. This also depends on what stage the divorce proceedings have occurred and what entitlements are available.
Applying for a pension sharing order
Hopefully your understanding of a pension sharing order is slightly clearer, and you’re probably wondering what the next steps are in terms of application and process.
As previously stated, you do need to apply to the court for a pension sharing order, as this is a legal requirement. Your pension provider won’t be able to amend or release your pension in such a way without guidance from a court order.
This may sound slightly daunting, but it’s really not. Most parties will be able to come to an agreement via their own solicitors/financial advisors and from there a court order will be applied for and completed in a quick manner.
If you had visions of having to take the stand, then do not panic. All this will be sorted behind the scenes.
If for whatever reason you can’t come to a conclusion between yourself and your party, then the court will simply take the matter into their own hands and work out the percentage of what you will both receive.
This will be done on a calculation of pensions assets and their value. The valuation method is known as a CETV (Cash equivalent transfer value). This is the lump sum amount of what you would receive if withdrawing from your pension.
Once a pension sharing order is completed and received, the administrator trustees of the order have 21 days to issue a notice of implementation and any charges that need to be paid.
This order must then be implemented within four months. This only applies for England and Wales as due to Scottish legislation; they must receive all their information within two months from the divorce proceedings for it to be valid.
This implementation process can be extended in certain and approved circumstances.
Once it is all finalised, both parties must be notified by the trustee within 21 days.
When considering a pension sharing order, it is always best to consult with a financial advisor to guide you on the most suitable options available. Don’t complicate your divorce any more than you need to, and ensure you have the right financial plan before applying for a pension sharing order.
What happens if a member of a pension sharing order dies before the share is implemented?
If a member of the party passes away after the pension order has been finalised, but before the pension has been implemented itself, the member will be taken into consideration under having benefits within the deceased members scheme. Death benefits would be taken into consideration and a settlement would occur depending on the contractual agreement. This is all down to the finalised court order put in place and the terms of the pension provider.
If a member passes away prior to the order being finalised, then it is approached slightly differently. The pension credit is still deemed to exist, and the proceedings and implementation will still take place. Again, this will be decided upon by the finalised court order and pension terms.
Can you apply for pension sharing if you are not married but live together?
The answer is no. Because pension sharing is through a court order and now a legality, it needs to follow the process of couples who are legally married or in a civil partnership.
Couples who live together with no legal binding will not be able to apply for a pension sharing order.
In circumstances such as a partnership separating with no legal binding, you can still seek legal advice. Even though both parties may not legally have the right to ownership of each other’s assets, you may still be entitled to having professional legal and financial advice about your shared assets.
Seeking a financial advisor in this situation could be an ideal way to separating shared assets in a civilised and fair manner.
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