When getting divorced, deciding how your assets are divided can be tricky, particularly when it comes to your NHS Pension.
Divorces are often complicated, particularly when it comes to dividing assets, such as pensions.
A pension could be a couple’s most valuable matrimonial asset, in some cases worth more than the equity in the family home. As such, it is important that pensions are considered in the financial settlement if a couple decides to divorce or dissolve their registered civil partnership.
If you work for the NHS and are getting divorced, a Pension Sharing Order could be the best way forward for you.
What is a Pension Sharing Order (PSO)?
Pension Sharing was introduced in 2000 as a way to make sure that assets are split fairly during divorce. Before then, spouses who hadn’t worked during the course of the marriage would be left with no pension entitlement following a divorce.
A Pension Sharing Order (PSO) means your ex-spouse will receive a share of your NHS Pension. This is known as Pension Credit. They will be entitled to this money within their own rights and can take it at their individual retirement age.
How could a PSO help me?
Pension Sharing offers a clean break for couples going through divorce. It’s also beneficial if you have a high value pension.
What are the implications of a PSO?
A PSO deducts a specific amount from your NHS Pension. This is referred to as a Pension Debit against your pension.
PSOs and the Lifetime Allowance / Annual Allowance?
How it affects you:
- The value of any Pension Debit from pension funds not yet accessed will not count towards your Lifetime Allowance (LTA).
- If you have registered for Primary Protection and the arrangements for the PSO were agreed after 5th April 2006, the protected amount of LTA will be reduced, if not lost completely.
- If you’re safeguarding your Lifetime Allowance with Individual Protection 2014 or 2016 (IP14 or IP16), the amount used for the protected value is then reduced by the amount of the pension debit.
- If the transfer day is on or after 6 April 2015 – 6 April 2017 (for IP14/ IP16), the Pension Debit is reduced by 5 per cent per full tax year that has elapsed since the 2013-14/ 2015-16 tax year. There is no reduction for a part year. This could result in IP14 or IP16 being reduced, or lost in full.
How it affects your ex-partner:
- A Pension Credit will not be treated as a contribution when checking against the Annual Allowance.
- The value of any pension credits received after 6 April 2006 will count against the LTA, even if the source of the credit is a pension already in payment.
- If a disqualifying pension credit* is received and the entitlement to the pension it came from arose after 5th April 2006, then your ex-spouse can register the pension credit for an additional LTA, as this will have already counted against the member’s LTA. This registration must be completed within five years after 31st January following the tax year when the PSO was made.
- Once your ex-spouse has received the pension credit, they will have full control over the investment and timing of when the benefits are taken.
- Your ex-spouse will pay tax on the part she/ he has been given as part of the pension credit.
*A disqualifying pension credit is a pension credit transfer that’s been paid from previously crystallised funds i.e. pension funds that have been accessed. This means no pension commencement lump sum/ tax free cash can be paid when the receiving member puts their benefits into payment.
How much will it cost to implement a PSO?
There is a charge to implement a PSO. This was reduced as of 1st July 2019 to £1,693.56 (including VAT). This cost covers acknowledgement and implementation of a Pension Sharing Order, including record creation and maintenance.
Pension Earmarking was introduced in July 1996 in England and Wales, and in August 1996 in Scotland and Northern Ireland. An Earmarking Order requires part, or all, of the member’s pension benefits to be paid to their ex-spouse or partner when they become payable at retirement. In Scotland, it’s not possible to earmark pension benefits.
Would I benefit from seeking financial advice?
Obtaining expert financial guidance and support is vital, especially when going through difficult times in life.
NHS Pensions vary in complexity and can be confusing at the best of times, never more so than during a divorce when the details need to be addressed carefully.
An independent financial adviser will discuss all the options available to meet your individual needs.
Tax advice is not regulated by the Financial Conduct Authority.