Pension Sharing on Divorce: What You Need to Know

Pensions can be dealt with in three ways under the Matrimonial Causes Act 1973:

• Pension Sharing Order (PSO) — section 21A. The pension is split at the time of divorce. The non-member spouse receives a percentage of the cash equivalent value (CEV) which is transferred into their own pension arrangement. After the order takes effect, each party has their own separate pension.
• Pension Offsetting — no statutory section; just a matter of negotiation. One party keeps the pension; the other gets a larger share of other assets (the home, savings, investments) in compensation. Common where the pension is small or where one party urgently needs the house.
• Pension Attachment Order (PAO) — section 25B-D MCA 1973. The pension stays in the original owner's name but, when it comes into payment, a percentage is paid to the other party. Falls if the recipient remarries. Rarely used now because of its inflexibility.

Pension sharing has been the dominant method since the Welfare Reform and Pensions Act 1999 made it available. Most divorces involving significant pensions use pension sharing for the main pots and offsetting for small AVCs.

The Cash Equivalent Value (CEV) is the standard figure. It is what the scheme would pay if you transferred out — the present value of your future pension rights. For defined contribution (DC) pensions (modern personal pensions, SIPPs), the CEV equals the pot value and is straightforward.

For defined benefit (DB) pensions (final salary, career average) — including most public sector schemes (NHS, Teachers', Civil Service, Armed Forces) — the CEV often significantly understates the actual income value. A 50-year-old with 25 years' service in the NHS pension may have a CEV of £200,000 but a guaranteed inflation-linked income of £15,000/year from age 60, which on a market annuity basis would cost £400,000+ to replicate.

For pensions over £100,000 or for any DB pension, you almost always need a Pensions on Divorce Expert (PODE) report — a chartered actuary's analysis showing the income value, the appropriate sharing percentage to achieve equality of income (often very different from equality of capital), and any specific scheme features that affect the valuation. Cost: £1,500-£3,500 for a comprehensive report. This is one of the best-value pieces of advice in family law.

Once you reach a financial settlement that includes pension sharing:

1. Negotiate the percentage in the consent order or court order. The percentage applies to the CEV at a specified date.
2. Draft the order in prescribed form — the Pension Sharing Annex Form D81 and the Pension Sharing Order itself must use specific wording. Mistakes can invalidate the order.
3. File the order with the court as part of the financial remedy proceedings. The court must approve it (consent orders typically approved without a hearing).
4. The order takes effect when the decree absolute (now Final Order) is made and the pension provider implements the split — typically 4 months after the order is served on the provider.
5. The pension provider transfers the relevant percentage to the receiving party's nominated arrangement — a SIPP, a personal pension, or (rarely) staying within the original scheme as an internal transfer.
6. Provider fees apply — typically £500-£2,000, paid by whichever party the order specifies (usually the member).

The State Pension is more complex. Two routes:

• Additional State Pension (the old SERPS / S2P element, frozen at April 2016 for new claims) — can be subject to pension sharing under section 49 of the Welfare Reform and Pensions Act 1999. A share goes to the other party as a "shared additional pension" they receive in their own right.
• New State Pension (for those reaching State Pension age after 6 April 2016) — cannot be subject to pension sharing in the same way. Instead, you can rely on your spouse's National Insurance contributions in limited transitional circumstances (you reached state pension age before 6 April 2016, or your spouse died with protected payments).

For most modern divorces, State Pension is left in each spouse's name and is not part of the financial settlement. The relevance is in calculating retirement income — if one spouse has a much lower State Pension entitlement, the private pension share may be increased to compensate.

Five recurrent problems:

• Using CEV for DB pensions without a PODE report. The CEV often dramatically understates the true value. Insist on a PODE report for any significant DB pension.
• Pension offsetting at face value. £100,000 of pension and £100,000 of equity are not equivalent: the pension has tax advantages (25% tax-free lump sum), age restrictions, and longevity protection. An informed exchange usually requires a 70-80% discount on pension value for offset purposes.
• Failing to identify all pensions. The starting point is the Form E disclosure, but spouses can have forgotten, dormant, or hidden pensions. Use the Pension Tracing Service (gov.uk/find-pension-contact-details) and HMRC's Pension Schemes Online for verification.
• Implementing the order incorrectly. Pension providers sometimes implement orders wrongly or with unexpected charges. Watch the implementation period carefully and challenge any deviations within the 21-day implementation appeal window.
• Final salary becomes career average. Many public sector pensions changed from FS to CARE schemes around 2014-2015. The pre-change rights are protected but the new accrual is different. PODE reports must address both.