Implementing a pension sharing order on divorce

  • Explain what a pension sharing order is
  • Understand how a pension sharing order is prepared
  • Explain how the pension transfer occurs
Implementing a pension sharing order on divorce
(Mathieu Stern/Unsplash)

While the number of divorces in England and Wales has been trending downwards since the early 1990s, more than half a million people got divorced in the past five years, which is clearly still a significant amount. People are also divorcing later in life.

In 1999, the mean age at divorce for a man was 41, for a woman 38. Twenty years later, and it is 48 and 45. 

Given the volume of divorces and the age profile of the divorcing parties, financial advisers are increasingly likely to encounter clients going through this process.

And whether it is an existing client or a new client, there is clear value that an adviser can bring over the short, medium and long term. 

In this article, we are focusing on the short term, in particular the process of implementing a pension sharing order (PSO).

Specifically, we will be looking at how the process works in a money purchase pension scheme for a PSO granted in England and Wales. 

What is a pension sharing order?

At a high level, a PSO is a way of sharing pension funds with a former spouse or civil partner following a divorce.

Under current legislation it is the only way a pension can be given to another person during the member’s lifetime – at least without incurring significant tax charges.

In practice, it forms part of the main divorce order, and the details are included in an annex to the order, the key detail being how much of the pension scheme is to be shared. 

It is important to note that in England and Wales this must be expressed as a percentage, and it is a percentage of the whole scheme.

It is not possible to specify a percentage of a certain asset or write a monetary amount. 

While most solicitors and courts will be aware of this, not all of them will be. Pension providers, however, are likely to pick this up and may be unwilling to implement the PSO if it is not expressed correctly.

Doing the preparation work

Here we are at the planning stage before the couple have gone to court.

If you are advising the member in their post-PSO planning, the exact value of the transfer to the former spouse or civil partner will not be known until further down the line, but hopefully you will still have a rough idea of how much will be leaving the scheme.  

Where a client will benefit from expert input here is assessing the investments to see if there are going to be any liquidity issues and helping them come up with a disinvestment strategy.

The best example here is a self-invested personal pension holding a commercial property.

I am still surprised to see cases cross my desk where the scheme is mostly tied up in property and there is no plan for raising cash.