When a couple breaks up, a pension-sharing order can provide them with a clean start, says David Davidson

More than four years have passed since the courts were given power by the Welfare Reform and Pensions Act 1999 to make pension-sharing orders on divorce. No properly researched, definitive statistics are available as to how many orders have been made, but it is clear from anecdotal evidence that the power is used with considerable frequency in devising financial settlements between spouses.


Pension sharing facilitates financial clean breaks between couples, particularly in cases involving couples of medium net worth (for example, £1 to £6 million in London and the South East). Such a clean break can be immediate or deferred. It is deferred where periodical payments from one spouse to the other continue for a time.


It has proved a more effective tool than the power to attach pension benefits introduced in 1996 by the Pensions Act 1995, which is available on judicial separation as well as divorce. The aspect of the attachment powers that is of real enduring use is the ability to attach lump sums payable on death. It is not possible to use pension attachment orders for the benefit of the children of the family. In practice, though, orders attaching lump-sum death benefits in favour of wives are used by consent to provide security for minor children's general maintenance or school fees.


The Civil Partnership Act 2004 will come into force in the near future, providing for same-sex couples to register civil partnerships. It has provisions mirroring precisely those in the Matrimonial Causes Act 1973 for the making of pension attachment orders in connection with orders for separation and dissolution of civil partnerships and for pension sharing on dissolution.


So it is that family lawyers have had to familiarise themselves increasingly with the workings of pension schemes, ironically, at a time when the Chancellor of the Exchequer's removal of advanced corporation tax relief and a major bear market have combined to reduce the widespread availability of final-salary schemes and the value of personal pensions. The spouse in whose favour the order is made receives a pension credit and the transferee spouse suffers a pension debit.


The Solicitors Family Law Association (now known as Resolution) conducted education roadshows around the country to ensure family lawyers were equipped with the necessary knowledge to advise clients on these changes.


Pension-sharing orders are made by reference to the cash equivalent transfer value (CETV) of pension rights. This requires an actuarial calculation in the case of defined benefit (final salary) schemes and a calculation of the fund value in defined contribution (money purchase) schemes.


Whereas family lawyers do advise clients with regularity on the principles of pension sharing, they cannot, under the Financial Services Markets Act 2000, advise on their implementation. Only actuaries and G60 qualified independent financial advisers may provide such advice. This split of roles does not lessen the need for family lawyers to understand the basic nature of pension schemes and the many different characteristics of the various private and public schemes of which clients are members. Without such knowledge, lawyers cannot foresee pitfalls in pension sharing. It is important to know what will happen when pension rights are shared.


If the member spouse is in a final salary scheme, the availability or not of an internal transfer (that is to say, becoming a member of the same scheme) to the spouse receiving a pension credit, is all important. With the fall in annuity rates, putting a pension credit in a personal pension policy will frequently purchase materially lesser benefits than leaving the CETV in the member spouse's scheme if it is a final salary scheme.


Small self-administered schemes by definition are usually partially invested in the business of the employer company giving rise to practical and fiscal issues on implementing a pension-sharing order.


The availability of early retirement in the police and fire schemes can mean that the CETV gives a misleading figure for the true value of the member's pension benefit. The fact that former members of the armed services receive an enhancement to benefits by way of indexation when they reach the age of 55 means a CETV of their rights obtained before they reach that age will not necessarily reflect their full value. It has been known for pension providers to make serious errors in calculating CETVs.


For all these reasons, family lawyers have to have recourse to actuaries for advice. The greater the lawyer's knowledge, the more precisely he can identify the advice required from an actuary and the less the cost for the client.


The Finance Act 2004 has now introduced a single-tax regime for the different types of pension schemes. This will come into effect on 6 April 2006. On that date, the maximum value of rights in a pension a person can have is £1.5 million, and the maximum they can contribute to a scheme or have their benefits enhanced in any fiscal year is £215,000, without suffering a tax charge on the excess.


There is provision for these annual and lifetime allowances to be indexed. There are transitional provisions for those whose rights already exceed the lifetime allowance or whose rights will exceed that allowance in time to register for primary or enhanced protection. The value of rights in defined benefit schemes is measured by formulae in the Act that are different from those used to measure the CETV. The Act also contains provisions concerning the impact of pension-sharing orders on these allowances.


David Davidson is head of family law at London law firm Charles Russell, a founder member of the International Academy of Matrimonial Lawyers and a member of Resolution's procedure and pensions committee. He is author of Pensions and Marriage Breakdown, published by Law Society Publishing. The book can be ordered direct at £29.95 (plus £3.50 p&p) from Marston Book Services, tel: 01235 465 656