How is pension sharing on divorce taxed in the UK?

Full answer

Pension sharing is one of three ways pensions can be divided on divorce in England and Wales (alongside pension offsetting and pension earmarking). A Pension Sharing Order is made by the family court and instructs the pension scheme to transfer a specified percentage of the pension to the other spouse. Tax treatment of the transfer The transfer of pension rights under a PSO is tax-free: -- No income tax on the transfer to the recipient -- No Capital Gains Tax (pensions are not chargeable assets for CGT) -- No Stamp Duty Land Tax or other taxes -- The transfer does not count as a contribution under the Annual Allowance rules (so it does not trigger an Annual Allowance charge even if the transferred amount would otherwise be large) Effect on the transferor (the person sharing their pension) -- A "pension debit" reduces the transferor's pension by the specified percentage -- If the debit exceeds the Lump Sum and Death Benefit Allowance or creates other anomalies, specialist actuarial advice may be needed -- Previous LTA protection may be partially lost depending on the value of the debit Effect on the recipient -- A "pension credit" is added to an existing pension scheme or a new scheme is established -- The credit grows within the scheme and is taxed as pension income when drawn in retirement -- The tax-free cash entitlement is proportionate to the credit received -- The recipient's Annual Allowance is not used by the receipt of the credit (but future contributions remain subject to their own Annual Allowance) Defined benefit vs defined contribution -- DC pension: transfer value calculated by actuaries; the cash equivalent transfer value (CETV) is moved to a new pension arrangement for the recipient -- DB pension: recipient may join the same scheme (internal transfer, if allowed) or take an external transfer value; internal transfers often preferred as DB pension is more secure Timing and costs The pension scheme charges an implementation fee (typically GBP 500-GBP 3,000) for carrying out a pension sharing order. This fee must be paid before the order is implemented. Pension sharing must be implemented within 4 months of the PSO being received by the scheme.