PTM029000 - General principles: Divorce and pension benefits
Glossary |
Pension sharing
Scheme role once a pension sharing order is made
Pension benefits not in payment
Pension benefits in payment
No existing pension scheme
Effect of pension credit on contributions to the pension scheme
Pension credit restrictions on benefits
Pension sharing
Pension sharing occurs when a couple:
- divorce, or
- dissolve a civil partnership.
It is possible for one party to acquire a share of the value of the other’s pension rights as part of the financial settlement to the divorce or dissolution. To do this they would have to apply to the court to obtain a pension sharing order which will award the one party a percentage of the value of the other’s pension rights. This amount must be used to provide the recipient with their own pension benefits.
In Scotland the process is essentially the same, although the pension sharing order might be achieved by a legally binding agreement rather than by a court order.
Scheme role once a pension sharing order is made
Pension sharing orders state the portion of the value of a member’s benefit rights that are to be awarded to the member’s ex-spouse or former civil partner.
When a pension sharing order is received, the member’s benefit rights in the scheme are valued to give them a cash equivalent. The cash equivalent is then reduced by the amount stated in the pension sharing order. This is known as the pension debit.
The cash equivalent amount of the reduction in the member’s benefit rights is then allocated to the ex-spouse or former civil partner to provide benefit rights in his or her own name. These new benefit rights are known as a pension credit.
The options may vary from pension scheme to pension scheme but the pension credit might be retained in the same scheme as the original member or it might be transferred into another pension scheme for the ex-spouse or former civil partner.
Pension benefits not in payment
Where a pension sharing order is made in respect of a member’s benefit rights that have yet to come into payment, the amount of those rights will be reduced to take into account the effect of the pension debit.
If a member has a pension debit there would not normally be anything preventing the member making contributions, subject to the normal restrictions on tax relief, to make up the shortfall in his or her benefit rights caused by the implementation of the pension sharing order. However if the member has applied for and subsequently received a valid enhanced protection, fixed protection or fixed protection 2014 certificate/reference number, on of after 15 March then paying extra contributions may cause the member to lose their protection. Individual's that have a valid protection prior to 15 March 2023 will not lose their protection on paying additional contributions.
Pension benefits in payment
If the member’s pension is already in payment at the time that the pension sharing order is made, the member’s ongoing pension would be reduced to take into account the effect of the pension debit.
No existing pension scheme
If the individual receiving a pension credit has no existing pension scheme of their own, that person might either become a member of the pension scheme that received the pension sharing order or, more commonly, the pension credit might be transferred to another pension scheme, such as a personal pension scheme.
Effect of pension credit on contributions to the pension scheme
If a person who receives a pension credit as a result of a pension sharing order is already a member of a pension scheme and is making contributions to the scheme, receiving the pension credit would not count for the purpose of the member’s annual allowance (see PTM050000 for further information on the annual allowance). Nor would it have any bearing on the member’s capacity to make contributions to the scheme.
Pension credit restrictions on benefits
The member of a scheme whose benefit rights derive from a pension credit can, in general, have the same benefits, in terms of the type of benefits as any other member of the scheme.
The only exception is where the pension credit derived from benefit rights that were in payment at the time of the pension sharing order. Where this happens the recipient of the pension credit cannot receive a lump sum as part of the benefits that are eventually paid in respect of the pension credit. The individual who received the pension credit may also be eligible to have an enhanced allowances - see PTM175100.