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Pension values 30% greater than the CETV.
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Pension debits
During pension sharing, section 29 of the Welfare Reform and
Pensions Act 1999 (WRPA
99) makes provisions for the creation of a pension debit
against the members pension rights and for the former spouse
to become entitled to a pension credit equal to the amount of
the debit.
In England and Wales the pension sharing value of the pension
debit is expressed as a percentage (or as a specified amount
if ordered by the court) of the cash equivalent transfer value
(CETV)
of the members pension rights. This figure will be stated in
each pension annex attached to the pension
sharing order as shown in the step-by-step
guide. The effect
of the reduction of a scheme members retirement benefits by
the pension debit is specified under section 31 of the WRPA
99. Where the members pension arrangement is a money purchase
scheme the percentage will be deducted from the CETV, this being
in many cases the fund value.
However, where the retirement benefits are vested in a final
salary pension the calculation using the CETV
Method is more complicated. Although the initial process
is similar to that of a money
purchase scheme where a pension sharing order is applied
as a percentage to the CETV, a statutory revaluation order will
be applied to the members pension rights at retirement age and
is known as a negative deferred pension.
The negative
deferred pension represents the current value at retirement
of the original pension debit and the scheme trustees must have
recorded the revaluation order to ensure Inland Revenue limits
are not exceeded. If the pension debit percentage is applied
to the retirement benefits at retirement, the deduction from
the members
pension rights would be greater than the negative deferred
pension resulting in a windfall for the provider, which is not
permissible.
Pension credits
As a result of a pension sharing order the former spouse will
be entitled to a pension credit being equal to that in value
to the pension debit against the members pension rights. Where
dual membership is allowed on pension sharing, and an internal
transfer option taken, section 36 of the WRPA 99 has inserted
a new Part III to the Pensions Schemes Act 1993 (PSA
93) to protect the rights of the former spouse that becomes
a member of an occupational
pension scheme due to the pension sharing order.
This means that any part of the pension credit derived from
retirement benefits that are subject to limited price indexation
(LPI) as part of those pension arrangements such as a public
service scheme applying to teachers, the civil service and
the NHS staff, including all safeguarded
rights, will also have LPI applied to the former spouses
pension rights after the transfer payment is made.
Furthermore, the former spouse will be entitled to all other
benefits under such schemes as a result of pension sharing,
and will be able to retire at his or her normal pension age
(NPA) as set out in the terms of the pension arrangement, make
further contributions subject to relevant
earnings and take a tax
free lump sum at retirement.
In a funded occupational pension scheme such as a final salary
pension, the fund provisions must be subject to minimum
funding requirements (MFR). If the scheme is found to be
in deficit, a pension credit may be reduced by the percentage
the scheme is under funded by at the valuation date. This reduction
will be applied if the pension credit is paid as an external
transfer due to pension sharing.
However, if the former spouse is allowed dual
membership to the scheme and opts for an internal transfer,
the pension credit is unlikely to be reduced. In the case of
an unfunded public service scheme an external
transfer due to pension sharing is not permissible, therefore
the former spouse must apply the pension credit to an internal
transfer. An unfunded scheme does not need to comply with
the MFR as benefits are guaranteed by statute and therefore
a deficit to the scheme member can never occur.
In the process of applying for ancillary relief and where one
or both of the parties have pension rights, this information
must be supplied by the scheme administrator and is shown in
the step-by-step
guide.
Pension sharing and earmarking orders
A pension sharing order cannot be made where there is an existing
earmarking order applied to a pension arrangement, as stated
in section 24B of the Matrimonial Causes Act 1973 (MCA
73). The Act does not specify to apply only to existing
marriages and therefore it can apply to any marriage
with an earmarking order.
In his article "A Practitioner's Guide to Pension Sharing
Part 1" [2000] Fam Law 489, David Salter shows that the
scheme member can avoid a pension sharing order to the detriment
of the current partner by transferring the retirement benefits
to a pension arrangement already subject to an earmarking order.
An earmarking
order cannot be made where there is a pension sharing order
applied to the pension arrangement, as stated in section 25B
and 25C of the MCA 73 and this applies only to the existing
marriage.
As a result of this legislation it will not be possible for
a former spouse to apply for an earmarking order against the
lump sum
death benefit where the pension arrangement is also subject
to a pension sharing order. This means it is not possible to
secure the continued payment of maintenance to a spouse in the
event of death of the former partner.
Disclaimer:
Information found on this site does not amount to financial advice or
legal advice. Every time you access the website you agree to be bound
by the Terms and Conditions.
If you do not agree to be bound by them, you should not use the sharingpensions.co.uk
website. Before taking any action regarding pensions, pension on divorce
or any other financial or legal matter you should seek professional
advice.
