Divorce or dissolution of a civil partnership can be a challenging time, especially when it comes to dividing assets. One significant asset often involved in these proceedings are pensions. Two of the options available to the Court for dealing with a fair division of pension assets between separating couples are Pension Sharing orders and Pension Attachment order. Let’s take a look at both of these options in more detail.
What is a Pension Sharing Order?
A pension sharing order is a court order that specifies how a pension fund or funds should be divided between divorcing or separating parties. This order allows for a financial clean break, meaning each party can move forward independently with their share of the pension assets.
How Does Pension Sharing Work?
When a pension sharing order is made, the pension fund is split according to the percentage specified by the court. The ex-spouse or civil partner receiving a pension share can either become a member of the pension scheme in their own right (where the terms of the scheme allow) or transfer their share to another pension arrangement, whether that be one they already have or one which they set up to receive the pension share.
This process ensures that both parties have their own pension funds moving forward. It is important that the recipient of the pension share seeks advice from an independent pensions/financial advisor about where it is best for them to transfer the pension share when the order is implemented.
Types of Pensions That Can Be Shared
Not all pension schemes can be subject to pension sharing orders. In England and Wales, various types of pension assets can be shared, including:
- Occupational pension schemes (including AVCs)
- Personal pension schemes
- Self-invested pension schemes (SIPP)
- Stakeholder pension schemes
However, certain pensions, such as the basic state pension, pensions already subject to a pension sharing order or pension attachment order and certain other specific pension benefits are excluded from pension sharing.
Benefits of Pension Sharing Orders
- Clean Break: Pension sharing orders provide a clean break, allowing both parties to move forward independently with their own pension funds.
- Fair Division: Ensures a fair division of what can be one of the most valuable assets in a marriage or civil partnership.
- Flexibility: The ex-spouse or civil partner can choose to remain in the existing pension scheme (if this option is available) or transfer their share to a new arrangement.
What is a Pension Attachment Order?
A Pension Attachment Order is a court order that directs a pension provider to allocate a portion of a pension’s benefits to an ex-spouse or civil partner. This can include a share of the pension income, lump sum benefits, or death-in-service benefits. Unlike Pension Sharing Orders, which split the pension into two separate pots, Pension Attachment Orders do not provide a clean financial break. Instead, they maintain a financial connection between the ex-spouses, as the payments depend on when the pension-holder accesses their benefits.
How Does a Pension Attachment Order Work?
When a court issues a Pension Attachment Order, it compels the pension provider to make payments to the ex-spouse or partner based on specific terms. These payments include:
- A percentage of the pension income when the member begins drawing it.
- A percentage share of the lump sum paid at retirement.
- Death benefits payable if the pension holder dies.
The pension policy itself remains in the name of the original owner, but the payments are redirected according to the court order. If the pension-holder transfers to another scheme, the attachment order automatically follows the transfer.
Type of Pensions that can be subject to a Pension Attachment Order
Some of the pension arrangements within which pension rights can be attached include the following:
- Occupational pension schemes
- Personal pension schemes
- Retirement annuity contracts
Unlike in the case of pension sharing orders, a pension which has already been the subject of a pension sharing order in relation to a previous marriage or civil partnership can be the subject of a pension attachment order.
Advantages of Pension Attachment Orders
- Financial Security: Provides financial security for a spouse without pension savings, ensuring they receive income and/or lump sum payments for retirement.
- Tax-Free Benefits: Enables a tax-free cash benefit, pension income, and death-in-service benefit to be earmarked.
- Automatic Transfer: If the pension-holder switches to a new pension scheme, the order will apply to the new scheme.
Disadvantages of Pension Attachment Orders
- No Clean Break: Does not allow for a financial clean break between divorcing parties, maintaining a financial connection.
- Uncertainty: There is no certainty as to when payments will start or how much will be received, as it depends on the pension-holder’s actions.
- Termination Conditions: Payments cease if the recipient remarries or the pension holder dies, unless lump sum death benefits are included in the order.
The Process of Obtaining a Pension Sharing or Pension Attachment Order
- Valuation of Pension Assets: Both parties must obtain valuations of all their pension assets from their pension providers. This valuation is crucial for determining the cash equivalent (CE) of the pension rights.
- Financial Disclosure: The valuation and other relevant financial information must be disclosed as part of the divorce proceedings (Form E).
- PODE Report: Where there are sufficiently large pension funds or where one or more of the pensions are of a type which is not a defined contribution scheme (e.g. a public sector pension) it is often helpful to instruct a Pensions On Divorce Expert (PODE) Report where a specialist pensions advisor looks at the parties’ pensions and advises on how best to achieve a fair outcome.
- Court Application: An application for a pension sharing or pension attachment order is submitted to the court, this can be as part of an agreed Consent Order or an application for the court to determine the terms of an overall financial settlement, to include pensions.
- Implementation: Once the court has made a pension sharing order, the pension provider will implement the division as specified in the court order and accompanying pension sharing annex which will also specify how the pension provider’s fees (if any) for the implementation process are to be paid. If a pension attachment order is made a copy of the order is sent to the pension provider so that the arrangements necessary to make the appropriate payments can be put in place.
Conclusion
Pension sharing orders and pension attachment orders are vital tools in ensuring fair and equitable division of pension assets during divorce or dissolution proceedings in England and Wales. By understanding the process and implications along with the limitations and potential disadvantages of both of these options, separating couples can navigate this challenging time with greater clarity and confidence in achieving a fair outcome.
How can we help?
If you need advice on choosing between a Pension Sharing Order or a Pension Attachment Order in family proceedings or have any other family law-related queries, please contact a member of our expert Family Law Team in Derby, Nottingham, or Leicester on 0800 024 1976 or via our online form.
The team will be happy to discuss your circumstances in more detail and give you more information about the services that our Family Law team can provide, along with details of our hourly rates and fixed fee services.
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