- 29th June 2022
- Posted by: Celticfp
- Category: Financial Planning
Divorce is often a stressful time for all parties involved. Emotionally and physically it can take its toll, then there is the separation of assets, this often includes pensions via pension sharing orders (PSOs).
However, pension sharing isn’t always the first thing divorcing couples think of. Typically, most people focus on what will happen to the family home. But pensions are a huge asset and important when planning your future – so deciding what to do with them is extremely important.
There are three options for dividing up pensions as part of a divorce:
- Sharing. Pension sharing is a formal agreement to divide your pension assets at the time of divorce. The courts work out exact percentages and the receiving party can become a member of the pension scheme or transfer the value to a new pension provider.
- Offsetting. The value of the pension is offset against other assets. For example, one spouse keeps their entire pension, and the other is given alternative assets (e.g. property or cash) of the same value.
- Earmarking. All, or part, of the pension is earmarked to be paid to one party when the other starts to draw pension benefits. There is no legal transfer of ownership.
What is a pension sharing order?
If you’ve decided pension sharing is the right option for you or that’s been mutually decided, then it’s important to know that it can only happen with a court order, but don’t panic this doesn’t mean that you have to go to court. The pension sharing order sets out how much of a pension(s) will be given to you or your ex-spouse, often a financial adviser could be involved in this process to understand the implications on future retirement incomes. This makes pensions different to other marital assets, such as the family home – which can be transferred to one spouse or the other.
It’s important to understand that pension providers or pension schemes cannot carry, divide or transfer any pension without instruction from the court.
Once your marital assets have been assessed, the court will award a percentage of one party’s pension value to the other person. The amount awarded is referred to as a pension credit, and the amount deducted from the other party is known as a pension debt. This will typically mean the person receiving a pension credit will need to have an active pension to accept this payment (not all pension schemes or plans will) or set up a new plan that will. Again, this is an area where a financial adviser can give guidance.
Most cases aren’t contested, as people come to an agreement through their solicitors. That means you only need a consent order from the court for the pension scheme provider to be able to make the necessary changes. In these cases, the application for a financial court order is usually concluded quickly and the pension sharing order granted.
If you are likely to receive a pension credit from a pension sharing order, then get in touch with the team for a free initial meeting to discuss your options in more detail.
This article is for information purposes only – should not be perceived as financial advice. We recommend you should always speak to a financial adviser before making any investment decisions.
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