Key process points for pension sharing on divorce

Given that divorces are often stressful, and given how complicated pensions can sometimes be, a financial adviser can play a useful role in assisting clients and solicitors on the financial aspects. This certainly applies with pension sharing orders (PSOs), which have a few pitfalls for the unwary. In this article, we’ll look at some of the key points within the process and highlight where advisers can help guide their clients.

Initial planning

The amount being transferred is called the ‘pension credit’. The first point to note is that it must always be expressed in the PSO as a percentage rather than a monetary amount. That’s the case in England and Wales. In Scotland, it can be a monetary amount or a percentage.

A percentage is arguably fairer than a monetary amount, as it accounts for fund growth or loss, particularly in defined contribution (DC) schemes. However, clients don’t always see it that way, and they often have in mind a fixed monetary target that they are trying to achieve.

Furthermore, a PSO must be expressed as a percentage of the whole scheme: there are no provisions for attaching it to particular asset or account within the pension.

While solicitors and courts ought to be aware of these points, there may not be that much scrutiny of the PSO if the parties have agreed to all the terms, and sometimes defective PSOs get granted. The risk is that a pension scheme administrator or trustee might refuse to process it, meaning the parties have to go back to court, which could be costly and time-consuming.

There can be informational challenges here for advisers. While the party with the pension will have to have disclosed the value in the discovery phase of proceedings, they are not required to disclose it at any other point and nor is the scheme administrator. This may make it challenging to plan properly for. The best advice here is to see if the party with the pension will voluntarily provide up-to-date valuations, but obviously this depends on whether the parties are still on decent terms.

If advising a client with a more complex or bespoke pension arrangement like a SIPP or SSAS, it’s also essential to come up with a plan for raising enough liquidity in the scheme to pay the pension credit. This will mean reviewing all the assets within the scheme. If there are investment accounts with funds and shares, it should be straightforward to plan for. However, if there is commercial property, bank borrowing or any kind of distressed investment, it will need more thought.

Effective date

It’s important to be aware of the effective date and what this means. This is the later of two dates – the date the final order for divorce is granted (formerly known as decree absolute) and 28 days after the PSO is granted. This is the point that the PSO takes legal effect, and anything in the scheme at that point is shareable.

This means that clients will need to be particularly careful about transactions around this date. For example, if a client makes a large contribution before the effective date, this will get caught up in the valuation for the PSO and become shareable, which might not be the client’s intention.

If either party dies after the effective date, the PSO must still be implemented. If it’s the party receiving the pension credits who dies, the scheme administrator will still calculate and process the pension credit, and the funds will then be paid out as death benefits (either by the current scheme or the new scheme). Importantly, the beneficiaries will be those relevant to the deceased and not the original member.

Implementation period

Once the scheme administrator has received the final order for divorce, the PSO and any transfer paperwork they require, the implementation period can start. This is a four-month period during which the pension credit must be transferred.

The scheme administrator chooses a valuation day within this period. They value the scheme and then apply the percentage in the PSO to the valuation. This gives you the monetary value of the pension credit.

Once this has been calculated, it’s set in stone and can’t be changed. It’s important to note that we could be several months on from the start of the process, and the value of the pension will likely have changed. Therefore, the monetary value of the pension credit may be different to what was anticipated.

Unfortunately, this is simply a by-product of how PSOs work. And while there’s no way to remove this uncertainty (given the pension credit is based on a percentage), clients would be advised to make sure all paperwork is returned and cash raised within the scheme as early as possible so as to try and make the process as quick as possible, thus reducing the risk of large valuation shifts.