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 many cases the spouse is nearing retirement and requires a pension income from either the internal or external transfer. Where this is a money purchase scheme, the spouse can use the pension fund to buy an annuity and has the option to use an open market option to search for the highest pension annuity. Once you have purchased an annuity it cannot be changed, so learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised annuity quote offering guaranteed rates.

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.