View more on these topics

Bring order to sharing

We started to look at the imminent introduction of pension-sharing orders last week and next week we will look at how these orders will be treated by the courts and by solicitors in practice.

Here, we look in more detail at the technical aspect of sharing orders.

Funded money-purchase schemes are the easiest type of scheme to consider for pension sharing orders. As an example, we shall continue with Maureen and Harold.

Suppose Maureen&#39s pension scheme had been a personal pension (although the same principles apply to all money-purchase pension schemes) with an accumulated fund of £163;100,000.

Harold, having secured the 30 per cent sharing order, is entitled to a transfer of £163;30,000 (30 per cent of Maureen&#39s fund of £163;100,000) to an approved pension scheme of his choice and in his name (whether, in fact, an occupational or a personal pension scheme).

Where such a transfer is effected, the benefits become payable to Harold according to, among other factors, the rules of the scheme from which, and to which, the transfer takes place, the types of benefits being transferred and Harold&#39s age.

Harold transfers his sharing award, which includes some protected rights, to a personal pension in his name.

The non-protected rights part of the transfer value may be paid to Harold from the age of 50, with 25 per cent of the fund being available in the form of a tax-free lump sum but the protected rights part only becomes payable when he reaches the age of 60, with no availability of tax-free cash.

The above rules apply where the scheme member&#39s spouse transfers his share away from the scheme, as is his inalienable right.

However, the scheme may, at its discretion, offer to retain the spouse&#39s share within the scheme. If the spouse accepts such an offer, the date at which benefits may be payable is determined by the rules of that scheme.

The vast majority of money-purchase schemes permit benefits to start to be taken from the age of 50 but no later than from the age of 75.

The principles of funded salary-related schemes are fundamentally the same as for funded money-purchase schemes but it is worth remembering that some salaryrelated schemes restrict the age at which benefits can be taken to, potentially, a higher minimum age than 50 and/or a lower maximum age than 75.

Moreover, where scheme rules permit benefits to be taken before the normal scheme retirement age, many schemes impose an actuarial reduction on the benefits, often meaning that the early taking of the pension is financially so detrimental that it prompts a strong encouragement to wait to draw benefits until normal retirement age. The scheme, therefore, must grant a transfer value in respect of the sharing order but may offer the spouse membership of the scheme as an alternative.

It is widely acknowledged that few salary-related schemes will offer the option of membership due to the admin inconvenience of accepting these new members, often with relatively small pension rights.

Pension sharing orders – unfunded schemes

As there is no money in the pot within the unfunded scheme(money-purchase and salary-related), that is, there is no fund, retired members are paid benefits by, at least notionally, ongoing contributions to the scheme.

A fundamental principle of pensions and divorce regulations – and those pertaining to pension sharing are no different – is that schemes should not be adversely affected financially by the impact of a sharing order.

If these schemes were to be obliged, as funded schemes are obliged, to offer a transfer value, obviously requiring money to be paid out of a pension fund which, in fact, does not exist, the whole basis of the scheme would be threatened.

The regulations stipulate, therefore, that these schemes may (and usually will) insist that the benefits for the spouse&#39s share are retained within the scheme and thereby become subject to that scheme&#39s rules.

Examples of unfunded schemes include unfunded unapproved retirement benefit schemes, which cover a relatively small number of typically higher-paid employees, and, most important, the majority of the big public sector schemes, with millions of members.

When does the money change hands? In answer to that question, money changes hands, that is, becomes payable to the spouse, shortly after the sharing order is made if a transfer value is available and taken.

The money will not change hands until benefits become pay able within the scheme age parameters.

Where does the money come from? We can first of all recall that the money (or assets) to settle a pension claim by set-off comes from the scheme member&#39s non-pension assets and the money to settle an earmarking order comes from the member&#39s scheme.

With a pension sharing order the money to settle the claim always comes from the member&#39s scheme in the first instance. But, of course, if a transfer of the benefits is effected, the money paid to the spouse will ultimately come form the new scheme.

How is the value of the benefits expressed? The amount of the sharing order should always be expressed as a percentage of the member&#39s fund (if money purchase) or benefits (if salary-related).

It may well transpire that the agreed pension-sharing order is calculated and expressed as a cash amount but invariably (or at least most of the time) this will be translated into percentage or fractional terms for the purpose of serving the order on the pension scheme.

When considering the valuation method ology, one must first of all consider the value of the benefits awarded to the member&#39s spouse (these are known as pension credits) and the value of the benefits deducted from the member (pension debits).

Credits and debits should always be equal in value although often not in the way that might at first sight appear obvious.

This balance between credits and debits works very differently for money-purchase and salary-related pension schemes.

Money-purchase schemes

Continuing our example of Maureen and Harold, you may recall that Harold was awarded a 30 per cent share of a money-purchase fund of £163;100,000. Harold&#39s pension credit is £163;30,000 and that figure is also Maureen&#39s pension debit. He has been awarded £163;30,000 and she has lost it.

Salary-related schemes

Let us suppose that Maureen&#39s scheme offered benefits on a salary-related basis and that Maureen had accrued 20 years&#39 reckonable service in a 1/60 scheme up to the date of divorce, at which time her salary was £163;30,000 a year.

Her accrued entitlement to benefit would therefore be £163;10,000 a year, that is, 20/60 of £163;30,000. Harold&#39s 30 per cent sharing order would therefore entitle him to the equivalent of six years&#39 service in the scheme (30 per cent of 20 years).

If Maureen was in an unfunded scheme, Harold&#39s sharing order would have the effect of “pretending” that Harold had been a mem ber of Maureen&#39s employer&#39s pension scheme for six years and had then left at the date of the sharing order, on Maureen&#39s salary as of the date of the order.

Thus Harold is gran ted a preserved pension, at the date of the order, of 6/60 x £163;30,000 -a preserved pension of £163;3,000 a year.

It is tempting, but too simplistic, to assume that six years&#39 service granted to Harold as a pension credit will result in the loss of six years&#39 service deducted from Maureen as a pension debit. It must be remembered that the pension credit is a preserved pension while the pension debit relates to an individual still in service.

Next week, we will see the effect this has on divorce settlements and the role that the IFA plays in negotiations.



It is obvious that standards of advice are linked to the competence of the adviser.Greater financial knowledge gained by consumers results in higher quality meetings with their advisers bec ause such consumers know the questions to ask and the options available to them. This is welcomed.The role of the press in educating the public is […]

LIA and IFP deal in doubt over fees

A deal between the LIA and the Institute of Financial Plan ning may be in jeopardy bec ause of differences bet ween the bodies over char ging clients fees.The deal, which would have seen LIA members able to qualify as certified financial planners, could collapse because the IFP stipulates that all members must provide cli […]

Hammer home the independent message

The outcome of the investigation into pol arisation is questionable to say the least. What is difficult to understand is that we are told we have a listening Government that positions itself as the people&#39s champion. Yet, quite evidently, consumer concerns have been overridden by the politics of the day.We are now seeing a scen […]

LIA backs Warland in product design row

The LIA is backing Autif director-general Philip Warland in the heated debate with the ABI over the role of Gov ernment in financial product design and marketing.The LIA claim it supports Warland&#39s recent comments that the Government has an important role to play in the design of financial products.Spokesman John Ellis believes it is unclear […]

9 October thumbnail

Johnson Fleming set to host webinar on auditing auto-enrolment schemes

With 23 auto-enrolment compliance notices issued by the Pensions Regulator, and an evolving legislative landscape meaning previously compliant schemes may now be in breach of regulation, now is the time to think about auditing your auto-enrolment scheme. Johnson Fleming is hosting a webinar on 9 October at 11:00 on how to audit your scheme to ensure compliance, avoid breaches and fines and overcome data issues.


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm