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Pension Credit (Divorce)

Also known as: Pension Sharing Credit, Pension Share

Definition

A pension credit (divorce) is pension rights awarded to an ex-spouse or civil partner under a court pension sharing order, creating an independent pension in their own name following divorce.

Understanding pension credits is crucial for medical professionals divorcing, as NHS pensions are often the largest matrimonial asset and pension division has permanent implications for retirement planning and estate planning in second marriages.

What Does Pension Credit (Divorce) Mean?

Under the Welfare Reform and Pensions Act 1999, pension credits are created when courts issue pension sharing orders. Section 29(1)(b) defines pension credit as new benefit rights allocated to an ex-spouse. When issued, the original member's pension is reduced (pension debit), and the ex-spouse receives their share as independent pension rights. This system replaced older attachment orders from December 2000.

For NHS pensions, the Cash Equivalent Transfer Value (CETV) calculates the share percentage. However, CETVs may undervalue defined benefit schemes' true worth of guaranteed income, inflation protection, and survivor benefits. Dr Sarah Thompson, a consultant with 22 years' service, divorced with an NHS pension CETV of £680,000. The court ordered 40% to her ex-husband David—a £272,000 pension credit. Sarah's pension has a permanent £272,000 debit, reducing future income by approximately 40%.

Schemes implement orders within four months. Ex-spouses become "pension credit members" with similar benefits but key differences: no survivor pensions, specific transfer windows (up to one year before normal pension age), and potential tax-free lump sum restrictions if the original pension was in payment (disqualifying pension credit).

Pension credits don't trigger immediate tax or count toward annual allowance. When taken, income is taxable, though recipients can usually take 25% tax-free. Both parties need updated estate planning. Michael, 51, received £156,000 from his first marriage and is marrying Dr Amara Khan. His pension credit provides retirement income but no survivor pension for Amara—only potential lump sum death benefits if nominated.

Common Questions

"What is a pension credit and how does it differ from a pension sharing order?" A pension credit is the actual pension share received following divorce, while a pension sharing order is the court order creating this division. The order reduces the original member's pension (pension debit) and creates independent pension rights (pension credit) for the ex-spouse.

"Can I keep my pension credit in the NHS Pension Scheme or must I transfer it elsewhere?" You can keep the pension credit within the NHS Pension Scheme as a pension credit member, or transfer it to another qualifying scheme within one year before normal pension age. Many benefit from independent financial advice on this choice.

"What happens to my pension credit if my ex-spouse dies or remarries?" Your pension credit is completely independent. It doesn't lapse if your ex-spouse dies or remarries, and you maintain full control regardless of their circumstances. However, pension credits have no survivor pensions.

Common Misconceptions

Myth: "My NHS pension is protected in divorce because it's in my name and I earned it"

Reality: Under UK law, pensions accrued during marriage are matrimonial assets subject to division, regardless of whose name they're in. Courts can issue pension sharing orders dividing NHS benefits, creating pension credits for ex-spouses based on marriage length, other assets, and each party's needs.

Myth: "If I receive a pension credit, I'll lose it if my ex-spouse dies before retirement or remarries"

Reality: Pension credits are completely independent. They don't lapse when the original member dies, remarries, or experiences any other life event. Once created, pension credits belong entirely to the pension credit member with no connection to the original member's circumstances. This differs from older pension attachment orders (pre-2000) which could lapse.

  • Divorce: The legal process enabling courts to issue pension sharing orders that create pension credits as part of financial settlements.
  • NHS Pension Scheme: The defined benefit scheme where complex CETV valuations often make NHS pensions the largest matrimonial asset for medical professionals.
  • Pension Sharing Order: The court order creating both pension debit and pension credit, implemented by schemes within four months.
  • Financial Settlement: The divorce settlement where pension sharing is one option alongside offsetting and attachment orders.
  • Second Marriage: Where pension debit and credit members must address survivor benefit implications in estate planning.

Need Help with Your Will?

After divorce, your pension credit or pension debit status affects your estate planning. Understanding these arrangements is crucial for creating a will that reflects your current pension position, especially when entering a second marriage.

Create your will with confidence using WUHLD's guided platform. For just £99.99, you'll get your complete, legally binding will plus three expert guides. Preview your will free before paying anything—no credit card required.

Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.