Pensions and divorce
Lisa Webster – Technical Resources Consultant
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Process and options
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Information
requirements
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Effective date
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Implementation
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Practical
issues
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Qualifying/disqualifying
pension credits
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Protection
implications
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Decree absolute
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Court order – Financial assets
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Consent order (agreed)
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Financial order (contested)
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Offsetting
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Earmarking
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Pension Sharing Order
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Often higher capital for one party e.g. savings and investments
versus higher valued pension.
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Historically offsetting is not £-for-£ basis as pensions have not been
easy to access, and inability to drawdown the whole fund.
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Is that discount open to debate, particularly with couples who are
over 55 and in money purchase pensions?
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Introduced in Pensions Act 1995 (in force Aug 1996)
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Only paid when former spouse takes benefits
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Recipient has no control of form, timing or investment decisions
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Stops if re-marry or die
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No clean break
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Don’t know how much will get or for how long
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Taxed as pension holder’s income
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Under pension freedoms may never take income
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Welfare Reform and Pensions Act 1999 (in force Dec 2000)
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Clean break
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Pension debit/pension credit
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% of rights to be transferred
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In Scotland can give £
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Not all schemes will offer internal transfer
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Welfare Reform and Pensions Act 1999
Part IV
Pension Sharing
Chapter I – Sharing of Rights Under Pension Arrangements
S28-34
Schedule 5
Pension Credits: Mode of Discharge
S1
The Pensions on Divorce etc (Provision of Information)
Regulations 2000
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Basic info trustees must provide:
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Valuation of member’s rights
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Summary of how calculated
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Statement as to whether will allow pension credit within scheme
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Schedule of charges
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Any other relevant info requested by court
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Additional info trustees generally required to provide includes:
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Name of scheme
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Address PSO to be sent
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If scheme is in wind-up
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If scheme is paying reduced CETVs
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Whether member’s rights already subject to PSO or bankruptcy
order
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Whether any rights are not shareable
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Whether charges payable before implementation
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Whether member is trustee
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Date court order comes into effect (legislation calls it transfer date –
confusing!)
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Contributions or transfers in after this date not “shareable rights”
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Any income taken after this date will not reduce shareable value
Later of...
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Decree absolute
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21 (or 28) days after PSO is granted
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Send to pension scheme:
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PSO and annex
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Decree absolute
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Completed pension sharing discharge form
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Four months from date scheme receives all docs
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Valuation date determined by scheme administrator
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Not same as effective date – so different value
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Ombudsman rulings show expect PSOs to be implemented asap:
Mrs Boughton v Punter Southall, Sept 2009
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Complaint upheld despite transfer being made within
implementation period
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Classed as unnecessary delay by administrator
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If over four months, but not scheme administrator's fault they will not
be held responsible
Mrs C Davies v Windsor Life, March 2012
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Example:
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50% PSO
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Effective date 1 June
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Fund value £500,000
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2 June withdraws £50,000
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Valuation date 1 August
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Fund value £455,000
Effective date fund split
50% ex spouse, 40% member, 10% withdrawn
PSO at valuation date
50/90 x £455,000 = £252,778
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1 Feb 2017 Brad’s SIPP valued at £350,000
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15 Dec 2017 PSO for 50% based on initial valuation (£175,000)
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20 Dec 2017 Decree absolute granted
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5 Jan 2018 Effective date (21 days after PSO)
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10 Jan 2018 Documents sent to provider – start of implementation
period
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20 Feb 2018 SIPP valued at £290,000
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26 Feb 2018 Transfer of £145,000 to Angelina’s pension
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Force disinvestment?
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In specie??
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Capped drawdown review as at effective date
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?
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Where member is in drawdown credit will be disqualifying
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No PCLS
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No UFPLS
But...
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Does not trigger MPAA
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Where uncrystallised - qualifying credit
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PCLS
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UFPLS
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Primary protection
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Cannot be given up
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Can be reduced or lost
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Must inform HMRC if have pension debit – new certificate
issued
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Reduction applies from effective date of PSO
Example
John has protected pension rights of £3m at A day
Pension debit of £300,000 in 2010
Protected pension rights now based on £2,700,000 at A-Day
Factor reduced from 2x SLA to 1.8x SLA
(SLA underpinned at £1.8m)
Now has 1.8 x £1.8m personal LTA - £3,240,000
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Enhanced protection and fixed protection
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Remains in tact
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Limited scope for rebuilding DB entitlement within appropriate
limit
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Lost if contributions are made to DC
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Individual protection
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Can be reduced or lost
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Must inform HMRC if have pension debit – new
certificate/reference number issued
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Reduction applies from effective date of PSO
If transfer date is more than 12 months after date of protection
(i.e. 6 April 2014 or 6 April 2016) amount of pension debit
reduced by 5% for each full tax year.
Example
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Geoff had funds valued at £1.7m at 5 April 2014 and holds
IP14
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Has pension debit of £400,000 effective date 15 June 2015
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Reduction of £380,000 (£400,000x 95%) reduces his
protection to £1,320,000
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Enhancement factor where:
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Credit acquired post A-day
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Pension was already in payment
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Pension came into payment post A-day
Pension credit factor
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Fraction of SLA credit represented at time acquired
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E.g. If £150,000 credit when SLA £1.5m then the credit factor
is 0.1
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Notify HMRC via APSS201
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Deadline 5 years after 31 Jan following tax year of PSO
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E.g. PSO 11 June 2015 deadline 31 Jan 2022
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HMRC issue certificate
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Enhanced or fixed protection
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Lost if pension credit transferred into new arrangement
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If transferred to existing arrangement no loss of protection
Primary or individual protection
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No direct impact
F
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Divorce (Financial Provision) Bill
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Offset where possible
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Avoid earmarking
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Keep PSO simple
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This presentation is for discussion purposes only. The information in it may not be reproduced or further
distributed to any person or published in whole or in part for any purpose and recipients must keep
confidential all matters contained in it. No representation or warranty, express or implied, is made or given
by or on behalf of the Company or its directors or any other person as to the accuracy or completeness or
fairness of the information or opinions contained in this presentation and no responsibility is accepted for
any such information or opinions.
Complexities of pensions in divorce proceedings, covering offsetting, earmarking, and pension sharing orders. Understand the implications on financial assets and protection. Learn about legislative references and information requirements for effective implementation.
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Presentation Transcript
Pensions and divorce Lisa Webster Technical Resources Consultant AJ Bell | 25 February 2025
Agenda Process and options Information requirements Effective date Implementation Practical issues Qualifying/disqualifying pension credits Protection implications A smarter way to invest 2
Divorce process Decree absolute Court order Financial assets Consent order (agreed) Financial order (contested) A smarter way to invest 3
The options Offsetting Earmarking Pension Sharing Order A smarter way to invest 4
Offsetting Often higher capital for one party e.g. savings and investments versus higher valued pension. Historically offsetting is not -for- basis as pensions have not been easy to access, and inability to drawdown the whole fund. Is that discount open to debate, particularly with couples who are over 55 and in money purchase pensions? A smarter way to invest 5
Earmarking Introduced in Pensions Act 1995 (in force Aug 1996) Only paid when former spouse takes benefits Recipient has no control of form, timing or investment decisions Stops if re-marry or die No clean break Don t know how much will get or for how long Taxed as pension holder s income Under pension freedoms may never take income A smarter way to invest 6
Pension Sharing Order (PSO) Welfare Reform and Pensions Act 1999 (in force Dec 2000) Clean break Pension debit/pension credit % of rights to be transferred In Scotland can give Not all schemes will offer internal transfer A smarter way to invest 7
Legislative references Welfare Reform and Pensions Act 1999 Part IV Pension Sharing Chapter I Sharing of Rights Under Pension Arrangements S28-34 Schedule 5 Pension Credits: Mode of Discharge S1 The Pensions on Divorce etc (Provision of Information) Regulations 2000 A smarter way to invest 8
Information requirements Basic info trustees must provide: Valuation of member s rights Summary of how calculated Statement as to whether will allow pension credit within scheme Schedule of charges Any other relevant info requested by court A smarter way to invest 9
Information requirements Additional info trustees generally required to provide includes: Name of scheme Address PSO to be sent If scheme is in wind-up If scheme is paying reduced CETVs Whether member s rights already subject to PSO or bankruptcy order Whether any rights are not shareable Whether charges payable before implementation Whether member is trustee A smarter way to invest 10
Effective date Date court order comes into effect (legislation calls it transfer date confusing!) Contributions or transfers in after this date not shareable rights Any income taken after this date will not reduce shareable value Later of... Decree absolute 21 (or 28) days after PSO is granted A smarter way to invest 11
Implementing the PSO Send to pension scheme: PSO and annex Decree absolute Completed pension sharing discharge form A smarter way to invest 12
Implementation period Four months from date scheme receives all docs Valuation date determined by scheme administrator Not same as effective date so different value A smarter way to invest 13
But ... Ombudsman rulings show expect PSOs to be implemented asap: Mrs Boughton v Punter Southall, Sept 2009 Complaint upheld despite transfer being made within implementation period Classed as unnecessary delay by administrator However... If over four months, but not scheme administrator's fault they will not be held responsible Mrs C Davies v Windsor Life, March 2012 A smarter way to invest 14
Effective v. valuation date Example: 50% PSO Effective date 1 June Fund value 500,000 2 June withdraws 50,000 Valuation date 1 August Fund value 455,000 PSO Member Withdrawn Effective date fund split 50% ex spouse, 40% member, 10% withdrawn PSO at valuation date 50/90 x 455,000 = 252,778 A smarter way to invest 15
Practical issues A smarter way to invest 16
Brad and Angelina 1 Feb 2017 Brad s SIPP valued at 350,000 15 Dec 2017 PSO for 50% based on initial valuation ( 175,000) 20 Dec 2017 Decree absolute granted 5 Jan 2018 Effective date (21 days after PSO) 10 Jan 2018 Documents sent to provider start of implementation period 20 Feb 2018 SIPP valued at 290,000 26 Feb 2018 Transfer of 145,000 to Angelina s pension A smarter way to invest 17
Practical issues A smarter way to invest 18
Practical issues Force disinvestment? In specie?? Capped drawdown review as at effective date A smarter way to invest 19
Qualifying or disqualifying credits? Where member is in drawdown credit will be disqualifying No PCLS No UFPLS But... Does not trigger MPAA Where uncrystallised - qualifying credit PCLS UFPLS A smarter way to invest 20
Protection issues - member Primary protection Cannot be given up Can be reduced or lost Must inform HMRC if have pension debit new certificate issued Reduction applies from effective date of PSO Example John has protected pension rights of 3m at A day Pension debit of 300,000 in 2010 Protected pension rights now based on 2,700,000 at A-Day Factor reduced from 2x SLA to 1.8x SLA (SLA underpinned at 1.8m) Now has 1.8 x 1.8m personal LTA - 3,240,000 A smarter way to invest 21
Protection issues - member Enhanced protection and fixed protection Remains in tact Limited scope for rebuilding DB entitlement within appropriate limit Lost if contributions are made to DC A smarter way to invest 22
Protection issues - member Individual protection Can be reduced or lost Must inform HMRC if have pension debit new certificate/reference number issued Reduction applies from effective date of PSO If transfer date is more than 12 months after date of protection (i.e. 6 April 2014 or 6 April 2016) amount of pension debit reduced by 5% for each full tax year. Example Geoff had funds valued at 1.7m at 5 April 2014 and holds IP14 Has pension debit of 400,000 effective date 15 June 2015 Reduction of 380,000 ( 400,000x 95%) reduces his protection to 1,320,000 A smarter way to invest 23
Protection issues ex spouse Enhancement factor where: Credit acquired post A-day Pension was already in payment Pension came into payment post A-day Pension credit factor Fraction of SLA credit represented at time acquired E.g. If 150,000 credit when SLA 1.5m then the credit factor is 0.1 Notify HMRC via APSS201 Deadline 5 years after 31 Jan following tax year of PSO E.g. PSO 11 June 2015 deadline 31 Jan 2022 HMRC issue certificate A smarter way to invest 24
Protection issues ex spouse Enhanced or fixed protection Lost if pension credit transferred into new arrangement If transferred to existing arrangement no loss of protection Primary or individual protection No direct impact A smarter way to invest 25
Final thoughts Divorce (Financial Provision) Bill Offset where possible Avoid earmarking Keep PSO simple A smarter way to invest 26
AJ Bell Investcentre This presentation is for discussion purposes only. The information in it may not be reproduced or further distributed to any person or published in whole or in part for any purpose and recipients must keep confidential all matters contained in it. No representation or warranty, express or implied, is made or given by or on behalf of the Company or its directors or any other person as to the accuracy or completeness or fairness of the information or opinions contained in this presentation and no responsibility is accepted for any such information or opinions. 0345 40 89 100 0345 40 89 200 enquiry@ajbell.co.uk 4 Exchange Quay, Salford Quays, Manchester M5 3EE Calverley House, 55 Calverley Road, Tunbridge Wells, Kent TN1 2TU 49 Southwark Bridge Road, London SE1 9HH AJ Bell includes AJ Bell Holdings Limited (company number 04503206) and its subsidiaries. All subsidiary companies that provide regulated services are authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales at 4 Exchange Quay, Salford Quays, Manchester M5 3EE. See website for full details. A smarter way to invest 27
