Navigating the complex landscape of pensions during a divorce or dissolution of a civil partnership can be a challenging endeavour, requiring both parties to comprehend the intricacies of how their retirement assets are divided and affected. As part of the divorce or dissolution process, the assets of a marriage or civil partnership are identified, and an agreement reached and/or an order made by the courts on how these assets or their cash equivalent value are to be shared. Pensions, often a substantial part of these assets, have seen significant evolution in their treatment during such settlements. Since 1995, the ‘Earmarking’ of pensions became an option, leading up to the Welfare Reform and Pensions Act 1999, which introduced the concept of Pension Sharing during divorce settlements. This act saw vital extensions, notably the inclusion of same-sex divorces from March 2014 and the dissolution of civil partnerships from December 2005.
Within this framework, the NHS Pension is no exception and becomes an essential component to consider. This article delves deep into the nuances of how NHS Pensions are treated during a divorce or dissolution process, addressing concepts like Earmarking, Pension Sharing, Cash Equivalent Transfer Values, and how these procedures impact both the Scheme member and the former spouse. With the potential to significantly influence future financial security, understanding these aspects is crucial for those involved in or considering a divorce or dissolution of a civil partnership, as they form a critical part of the division of marital or partnership assets.
What does Earmarking mean for an NHS Pension after a divorce?
Earmarking Orders in England and Wales have been replaced by Attachment Orders, which the court can make against benefits payable from the NHS Pension Scheme. The pension still remains that of the scheme member, but the scheme is required to make some form of payment to the former spouse after divorce; this can be derived from the member’s NHS Pension, lump sum (if the scheme provides for one), death benefit or additional voluntary contributions benefit. Earmarking is still available in Scotland.
What is Pension Sharing and how does it affect an NHS Pension?
Pension Sharing Orders are orders which the court can serve on the NHS Pension Scheme specifying a proportion of the value of the member’s benefits to be used to create a pension benefit for the former spouse after a divorce. The member’s benefits are reduced (known as a Pension Debit) and the former spouse/partner (known as a Pension Credit Member) holds benefits in their own right, independent of the scheme member. Note: Although earmarking/attachment is still possible, pension sharing is more common because of its ‘clean break’ approach to the division of pensions on divorce by providing the former spouse/partner with a pension in their own right.
Requests for information on an NHS Pension during divorce
The court will need information about the member’s pension benefits and the NHS Pension Scheme when considering a Pension Sharing Order during a divorce. As part of the first stage towards pension sharing, a scheme member may be asked to obtain a Cash Equivalent Transfer Value of their pension benefits.
What is a Cash Equivalent Transfer Value (CETV)?
A CETV is the capitalised value of a member’s pension benefits under the scheme. It is calculated in accordance with the NHS Pension Scheme regulations by reference to guidance and tables provided by the scheme Actuary. Where a member is a scheme pensioner the CETV represents the capitalised value of the actual pension in payment.
How does an NHS Pension Scheme member request a Cash Equivalent Transfer Value in the event of divorce?
A member can download a copy of the CETV request form (PD1) from the ‘Pensions on Divorce or Dissolution of a Civil Partnership’ section of NHS Pensions website, or request a copy from their employer. Active members, or those who have left the scheme within the last 12 months, must also ask their employer to complete form PD2. Members are entitled to one CETV request per year for any purpose. They must confirm if the CETV is for divorce proceedings, and it is important to let NHS Pensions know if a court date has been set.
How long will an NHS Pension member have to wait for a Cash Equivalent Transfer Value in the event of divorce?
Under the Pension Sharing on Divorce (Provision of Information) Regulations 2000, NHS Pensions has three months from the receipt of a request for a CETV for divorce proceedings to provide the information.
Implementing a Pension Sharing Order (PSO) on an NHS Pension during divorce
Once the court and the couple have agreed the terms of any pension sharing, a PSO will be served on the scheme. It will specify a percentage of the CETV to be allocated to the former spouse and the effective date of the order. NHS Pensions has four months under the Welfare Reform and Pensions Act 1999 in which to implement a PSO in the event of divorce and this is known as the implementation period. Both the member and the former spouse will receive confirmation that the order has been implemented via a Notice of Discharge of Liability.
What happens to the NHS Pension members benefits after divorce?
The value of the member’s benefits is reduced by the percentage allocated to the former spouse in divorce settlement at the effective date of the order and this is known as the Pension Debit. When the NHS Pension member retires, the Pension Debit will be increased in line with the cost of living and deducted from the benefits payable. For annual allowance purposes the member’s benefits are reduced with effect from the following tax year. The recipient is not subject to any annual allowance tax liability on receipt of the benefits.
What happens to dependant benefits after a divorce settlement?
If the member remarries, the pension share will reduce any surviving partner benefits payable but allowances for dependent children are not affected.
What does the pension share provide for the former spouse?
A pension share provides the former spouse, known as the Pension Credit Member, with pension benefits payable at the Normal Pension Age. This will be either age 60 (1995 Section) age 65, (2008 Section), or State Pension Age (minimum age 65) for the 2015 Scheme.
After a divorce NHS Pensions will advise the Pension Credit Member of the amount of these benefits and the age at which they will become payable. A Pension Credit will provide the following options:
• Commutation of trivial (small) pension
• Early payment of a Pension Credit with actuarial reduction
• Early payment of a Pension Credit on health grounds
• The option to exchange part of a Pension Credit for lump sum (this only applies where the PSO has been implemented prior to the members retirement and the pension credit is payable on or after 6 April 2009)
• Maximum commutation on the grounds of terminal ill health.
Pension Credit membership does not carry all the rights of a full Scheme member. A Pension Credit Member is not entitled to:
• Transfer these benefits out of the Scheme
• Transfer benefits from any other pension arrangement into the Scheme or purchase additional benefits in the Scheme
• A pension share does not provide surviving partner or dependant’s benefits.
If the Pension Credit Member is also a scheme member in their own right, Pension Credit benefits are held separately and do not count towards any other benefit entitlement from the NHS Pension Scheme
Membership requests and benefit calculations
Employers should be aware that if they obtain membership details from NHS Pensions there is no reduction in membership when a member’s benefits are subject to a PSO; it is the benefits payable in respect of that membership that are reduced. Benefits are calculated as normal, as if no pension sharing has occurred. Cost of living increases are applied up to the date of retirement to the basic amount of reduction in the benefits (the Pension Debit), calculated at the time of pension sharing. The second calculation is deducted from the first to get the reduced amounts payable.
The benefits that are reduced are the pension, lump sum (if the scheme provides for a lump sum), and surviving partner pension (short term pensions, where the person dies in membership, are unaffected) and all dependent children’s allowances are unaffected.
It is not possible to replace benefits that have been shared, however dependent upon HMRC and scheme regulations in force at the time, it may be possible for a member to purchase additional pension to increase their benefits.
Transferring NHS Pension benefits
If a member wishes to transfer their benefits out of the NHS Pension Scheme and these benefits have been the subject of a PSO, the transfer payment made will reflect the reduction applied to the member’s benefits following the implementation of the PSO. The pension payable to the Pension Credit Member will remain within the NHS Pension Scheme however as it is non-transferable.
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.
Content correct at time of writing and is intended for general information only and should not be construed as advice.