What happens to your pension during divorce?
3 August 2022
What Happens to your Pension During Divorce? Pension Sharing Orders explained by wealth management expert Michael Reed
Navigating pensions and a divorce simultaneously can be a complicated and draining process, with divorce proceedings adding an extra layer of complexity to an already technical discussion relating to your funds.
However, deciding the fate of your assets, including your pensions, does not necessarily need to be an overwhelming process – especially if you have all the knowledge and support you need to make the right decisions. To help you understand what a pension sharing order is, and all the associated jargon and areas of consideration, we spoke to Michael Reed of Michael Reed Wealth Management to collate his advice in the below article to guide you through the process of dealing with a pension sharing order with reliable information and advice.
What is a pension sharing order?
A pension sharing order is a court order that is used to separate two individuals’ pension assets after a form of separation, such as a divorce, or when a civil partnership has been dissolved.
For many couples, pension sharing is an important aspect of the relationship, as it can often be as valuable as other marital assets such as properties. Additionally, many people depend on their spouses to support them financially throughout their life.
Without a pension order, the separation may cause these individuals to be left with no financial and/or retirement benefits. Pension sharing benefits were introduced to prevent people from finding themselves in these circumstances.
How does the pension sharing order process work?
Firstly, if you have initiated the formal divorce proceedings, the pension sharing order is issued by the court. From here, your ex-spouse must submit any documents regarding the pension arrangements that either of you have.
Once adequate information has been provided, the court will then intrust the pension provider to begin the implementation process. If the transferee’s pension scheme allows transfers, then funds from your partner’s pension will be moved into their individual plan. Alternatively, a new pension plan will be created in the name of the transferee.
The length of this process depends on the nature of your partnership and the separation proceedings. Therefore, it could take a few months for the pension sharing order to be fully carried out.
Delay in implementing pension sharing order
If there is any kind of delay in implementing the pension sharing order, the funds will remain within the merged pension scheme and will still be available to your ex-spouse. Failure to implement a pension sharing order is a serious problem, potentially rendering the pension company legally liable.
If any spouse or partner is at fault, they must go back to their solicitor to ask for it to be completed. However, they will be personally liable for any fees associated with this process.
Pension sharing order – crystallised benefits
A pension becomes ‘crystalised’ once someone withdraws a retirement income from their pension fund and cashes in the funds. The earliest you can crystalise your pension is 55, unless you get early access due to ill health.”, Michael started.
You can withdraw your crystalised pension to gain access to your pension savings either through drawdown, by withdrawing a 25% lump sum tax-free, or by purchasing annuity.
Pension sharing order – can I take a lump sum?
As mentioned above, should you crystallise your pension, you may be eligible to withdraw a lump sum free of taxations.
However, in other circumstances, since the pension sharing order only comes into effect after you have become a pensioner, your ex-spouse will not be able to take a tax-free lump sum.
Pension sharing order and lifetime allowance
The pension sharing order, as part of divorce settlements, can affect either party’s pension.
The impacts are dependent on whether an individual has given up their pension rights (pension debit), or are receiving them (pension credit), and whether or not they have a transitional protection. Typically, a pension sharing debit will not have any impacts on LTA.
Pension credits, on the other hand, can see an individual receiving a pension credit claim and increase in their LTA. This can be impacted by when the pension credit rights were acquired.
For example, if they were acquired after 5 April 2006 (tax year), an individual can only claim an increase to their LTA if the original member’s pension came into payment after 5 April 2006, and was in payment when the pension sharing order was made.
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