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5 Pensions on Divorce

Prior to the Pensions Act 1995 the value of pensions contracts were taken into account in divorce proceedings. As the court had no power to order payments to be made to an exspouse out of pension benefits when they fell due, the value of benefits were ‘offset’ against other assets. In practice this meant that the non-pension owning spouse would often be left with no pension benefits, but would instead receive a capital sum, or the family home.

It is now possible to use pension entitlements as part of a divorce settlement by giving part of the accrued pension to the divorced partner. A Court Order is made to confirm the outcome and this can be done in one of two ways:

  • Pension Sharing. Under this method the pension entitlement is split between the two individuals so that each can deal with their own entitlements separately.
  • Pension Earmarking. Under this method the pension is not split, but rather a proportion of the accrued pension is earmarked for the benefit of the divorced spouse.

In practice the great majority of Pension Orders provide Pension Sharing so that each individual can deal with their own entitlements separately. The Order will specify the percentage to be allocated to the divorced spouse, and this is then transferred to a separate pension scheme for him or her. Where the pension arises under a Company pension scheme, then there is the possibility that the Company scheme trustees will allow the divorced spouse to become a member of the scheme to hold their share of the pension. However most Company schemes do not allow that option.

In most cases, therefore, pension sharing on divorce will result in a transfer of pension for the divorced spouse to a personal scheme or to a scheme of their current employer. The issues regarding transfers are much the same as for an individual leaving a pension scheme and individual financial advice should be taken. Pension holders may require advice on how they can rebuild their retirement provision after an earmarking or pension sharing order. This could involve making additional contributions or utilising alternative long term investments such as ISA’s.

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