In this article, Karen Watson-Brown, Specialist Financial Adviser at Wesleyan Financial Services, discusses how getting a divorce could impact your NHS pension.
According to data from the National Office of Statistics, marriage and divorce is on the rise in people over 65. However, during a divorce, it appears that there is a degree of uncertainty regarding pensions.
A recent survey by Wesleyan Financial Services found that one third of the participants were unsure of what would happen to their pension during a divorce, and a further 16% wrongly think that their partner is not entitled to any of their pension wealth.
Understanding what could happen to your NHS and/or private pension during a divorce may not be the most comfortable topic, but it is an important consideration. Depending on the circumstances, a pension is generally considered a joint asset – this means that it is subject to division in divorce.
Despite the fact that pensions can be highly valuable assets, they are often overlooked during divorce, when matters such as property, children and even pets all remain at the forefront in terms of importance.
The division of assets
Typically, during divorce proceedings, both parties establish what they have in terms of assets. If neither party can agree on the division of assets and mediation proves unsuccessful, their solicitors can ask a court to make a financial order to determine how the assets should be divided on their behalf.
As part of the application, both parties may be asked to complete a financial statement, or Form E as it is more commonly known. This form asks for detailed information regarding all assets, including all pension plans and schemes.
Each divorce is different. While some couples agree amicably on who will get what during a divorce, for others it may be more complicated.
It may be the case that one spouse has stayed at home to raise the children and has been unable to build a pension to provide for their future because they’ve been supporting the other spouse who has been earning and feel that it is grossly unfair.
This is often when the value of pensions is taken into account during a divorce and related financial settlements, and where a Pension Sharing Order (PSO) may be issued.
What is a Pension Sharing Order (PSO)?
A Pension Sharing Order (PSO) is a formal agreement to divide your pension assets at the time of divorce. The court decides what percentage of a pension should be shared to the former spouse. A PSO can be issued to both NHS pension scheme members and holders of private pensions.
How could a PSO affect your NHS pension?
A PSO can be legally served on the NHS Pension Scheme, specifying that a percentage of the value of the member’s benefits must be used to create a pension benefit for the former spouse, or civil partner.
This will be based on a cash equivalent transfer value – the capitalised value of a member’s pension benefits under the scheme. This is essentially a calculation of what the pension would convert to as a pot of money when that member reaches normal retirement age.
It would then be divided according to the court order between the two parties, and allocated to the recipient as a pension credit. They will not have access to it until they reach retirement age.
How to request a cash equivalent transfer value
If as part of the divorce process the scheme member is required to obtain a cash equivalent transfer value of their pension benefits, they can download a copy of the pensions on divorce/dissolution of a civil partnership cash equivalent transfer value (PD1) from the NHS pensions website, or request a copy from their employer.
They will then need to submit their application to their employer and the completed form. Cash equivalent transfer value (PD2) will be returned to them.
Once the divorce is finalised, and the former couple and the court have agreed on the terms of pension sharing, a PSO will be served on the scheme which will specify the percentage of the cash equivalent transfer value to be allocated to the former spouse and the effective date of the order.
What is earmarking?
A pension attachment, or earmarking orders, relate to the NHS Pension Scheme. The difference to a PSO is that in this case the pension still belongs to the scheme member, but the scheme is required to make some form of payment to the former spouse when the member’s benefits become payable.
Although earmarking is still possible, PSOs are more common. The PSO approach to the division of pensions in divorce provides the former spouse or civil partner with a pension in their own right.
How could a PSO change your retirement plans?
According to the Retirement Living Standards, £43,100 a year is required for a comfortable standard of living for a single person. At the other end of the scale, £22,400 a year is required for the minimum standard.
To paint a clearer picture of how a PSO during a divorce could potentially impact your retirement, let’s imagine a dentist earning £100,000 per year with a guaranteed £50,000 of pension per year when they reach normal pensionable age.
As a higher earner, it is likely that this dentist is accustomed to a comfortable standard of living and their pension at £50,000 would have ensured that this continued into retirement.
However, during said dentist’s divorce, a PSO is granted by the court, which stipulates that 50% of their pension is payable to their former spouse. This dentist will now only receive £25,000 of their pension in retirement – putting them in a very different position.
They will go from being a high earner during their career to being a lower end pension earner. This could have a significant impact on their retirement plans unless they take action now to make up for the reduction to their pension.
Seeking specialist guidance
Buying a property, getting married or having children are life events that mean many medical and dental professionals seek guidance from their Specialist Financial Advisers. Divorce is also a life event, and depending on the settlement agreement, it can have a massive financial impact on your future.
For example, if you get divorced at age 40 and a PSO is registered with the NHSPS or private pension, it will affect your pension benefits accumulated to the date of the PSO (the benefits after that date will belong to you).
Once a PSO has been issued, it won’t change. However, what can be changed is what you can do to make up for the deficit.
Therefore, I would stress to any doctor or dentist who has worked for the NHS or paid into a private pension and is now getting divorced to get in touch with their adviser for a financial review. In terms of financial planning, the sooner any changes to circumstances are addressed, the better the potential outcome.
For further support and guidance when it comes to your NHS pension, speak to your Specialist Financial Adviser at Wesleyan Financial Services today.