What is a pension sharing order (PSO) in the UK?
What is a pension sharing order in the UK?
What is a Pension Sharing Order and How Does it Work?
When a couple is going through a divorce, the fair division of assets can be one of the trickiest tasks to complete. After the family home, it is often the case that the bulk of a couple’s assets are held in various pension pots. However, unlike the family home, which is typically held under joint names, pensions are usually held in the name of an individual and very often the amount of pension savings each party has under their name is unbalanced. As a result, in order to unlock the value of the pensions and for a portion of the pension savings to be transferred to another party, pension operators need a formal Pension Sharing Order to be in place.
A Pension Sharing Order is a court order that enables couples to divide a pension pot upon divorce or dissolution of a civil partnership. It allows the pension to be split between the two parties in an agreed-upon proportion and is an important part of the divorce process in the UK.
The process of obtaining a Pension Sharing Order involves both parties submitting their personal financial information and subsequently agreeing on how much each will receive from the various pension pots in order to reach a fair financial split.
This agreement can be undertaken via negotiation, mediation, or if necessary, through court proceedings. Once agreed upon, a Pension Sharing Order must be issued by a court before any division of assets can take place.
In this article, we will discuss what a Pension Sharing Order is and how it works in more detail. We will also look at some of the benefits and risks of Pension Sharing Orders, alongside some alternatives to Pension Sharing Orders.
What are the benefits of pension sharing for couples undergoing divorce?
Pension sharing for couples undergoing a divorce is a complex financial matter that requires careful consideration. In the UK, pensions are usually treated as part of the financial divorce settlement and must be taken into account when dividing assets.
Pension sharing can be beneficial for both parties, as it allows them to divide their pension assets fairly and equitably. This means that after the divorce, both parties will have their own separate pensions that are totally independent of each other, giving them full control over how the funds are invested, contributed to and eventually drawn down upon once retirement age is reached.
What are the risks of pension sharing for couples undergoing divorce?
Pension Sharing Orders are an important part of the divorce process for couples who have built up pensions during their marriage. However, there are certain risks associated with Pension Sharing Orders that couples should be aware of before deciding to go ahead with a pension sharing order. These risks include the potential for one party to receive a larger share of the pension than the other, as well as the potential for tax liabilities and other financial losses.
What are the alternatives to splitting pensions via a Pension Sharing Order?
Splitting pensions through a Pension Sharing Order is one of the most popular options for couples going through a divorce or dissolution in the UK. However, there are other alternatives available to couples who wish to divide their pensions when undergoing a divorce.
Two of the most popular alternatives to a Pension Sharing Order are Pension Offsetting Orders and Pension Attachment Orders (also known as earmarking).
A Pension Offsetting Order is where the value of a pension is offset against other assets being split as part of the financial settlement. Usually, this involves the ex-spouse receiving a larger share of the matrimonial home. Furthermore, neither the death nor remarriage/re-civil partnership of either party has any effect on the Pension Offsetting Order.
It’s worth mentioning that although Pension Offsetting provides a clean break financially, it may or may not provide a ‘fair’ split of assets, depending on what other assets have been used in the offsetting process. In the case of a Pension Attachment Order (also known as ‘earmarking’), the proportion of the pension value is ‘earmarked’ for the benefit of the other party once the party that owns the pension either retires or dies.
As a result, an attachment order is effectively deferred maintenance, giving the ex-spouse a portion of the pension built up during their marriage/civil partnership. However, Pension Attachment Orders may lead to issues upon death or re-marriage/re-civil partnership of either party and they do not offer a clean break financially – which may be less appealing than some of the other options available.
Conclusion.
Each of these options for splitting pension at the point of divorce has its advantages and disadvantages that need to be carefully considered before making a decision. Equally, you may find that what starts off as an amicable negotiation between divorcing couples can quickly sour once the detail of every financial asset is assessed and allocated. Furthermore, achieving a financial clean break from the other party may be more important than achieving absolute financial fairness, so getting expert advice should be front and centre in your mind when negotiating a financial settlement.
What’s next?
Are you looking for advice and guidance on pensions and want to understand your best options for achieving a fair and efficient share of your assets? AV Trinity are Pensions on Divorce Experts (PODEs). We provide expert advice and guidance on pension sharing orders, the tax treatment of pensions in a divorce, retirement benefits and all other financial matters related to divorce. Our team of experienced professionals have years of expertise in financial planning and can help you understand your options.
With AV Trinity, you can get bespoke advice tailored to your specific needs and circumstances. We understand the legal complexities involved in divorce proceedings and will work with you to find the best solution for your financial future. Start your journey to a secure financial future post-divorce and contact us today to arrange a free initial consultation.
Don’t forget, this article offers general financial information and should not be taken as personal advice. Remember that investments and pensions can go up and down in value, so you could get back less than you put in. Tax rules can change and the benefits depend on individual circumstances.