One of the most obvious advantages of pension sharing is that a client will have a pension fund or pension rights at the time of divorce, so they don’t have to build their pension up from scratch.
According to Ian Naismith, pensions expert of Scottish Widows, it also gives control of the pension to the ex-spouse, rather than them being dependent on the scheme member, for example in setting a retirement date.
Earmarking is also lost if the person due to receive the pension remarries.
“Sharing arguably achieves a better balance than offsetting, where one partner can be left badly off financially in the short term and the other without any pension.
“However, it might be difficult to achieve sharing of other assets, such as the family home, without selling them and splitting the proceeds.”
This will affect the amount of share that can be given, as it will be split on a percentage basis.
He continues: “Sharing is also complex, and generally requires the ex-spouse to set up and transfer to a different pension (unless the original pension is a public sector one) and can be expensive.”
The pension scheme has the right to deduct “reasonable” costs from the pension, Mr Naismith adds.
Clare Moffat, technical manager of Prudential, sayss another potential downside with pension sharing is that very few defined benefit schemes will allow the ex-spouse to stay in the scheme, so they have to transfer out.
She warns this means that the fund is then subject to investment performance and not a defined amount of pension at retirement.
Hannah Foxley, Chartered financial planner at The Women’s Wealth Expert, counters that if the scheme rules do allow, the ex-spouse can become a member of a defined benefit scheme in their own right and can take their benefits when it suits them.
“The disadvantage of pension sharing is that someone will be losing pension benefits; if the pensions are already in payment, this can result in a significant reduction of income.”
With pension sharing, Ms Foxley warned it is not possible to share lump sum death benefits and so life cover to make up for these lost benefits will need to be considered.
Ms Foxley notes parties who do not wish to share their pension may take steps to make it difficult for this to take place, or to destroy the value of the pension for the purposes of the share.
They may invest into bad investments, transfer the fund to an overseas scheme that doesn’t have to recognise a UK pension sharing order or invest into illiquid funds making it impossible to share.
If this is likely to be the case, Ms Foxley says the asset will need to be frozen by the court to prevent it from happening.
