Divorce and the new state pension
Family briefing: the new state pension arrangements abolish the additional pension previously taken into account when assessing financial provision, but there are important transitional provisions
The new state pension was introduced in April 2016. What do family lawyers need to know about it? What impact has its introduction had on the valuation and sharing of state pensions on divorce?
Old scheme/New scheme
The new pension scheme is underpinned by a policy decision that individuals should build up a pension in their own right, and that while the basic state pension will continue to provide a foundation, private companies, not the state, are the preferred pension provider for any additional provision. The option of paying in to an additional state pension is therefore disappearing, and the sharing of state pensions on divorce is also being phased out.
The old system had two parts, the basic pension and the additional state pension. Under the old system, if a person paid national insurance contributions (NIC) for 30 years or more they were entitled to a full basic state pension, currently worth £115.95 per week. Over and above that, as long as they were not in a “contracted out” occupational pension, their NIC gave them rights to an additional state pension, also known as SERPS or S2P. If they paid in for a long number of years, they could build up quite a substantial additional state pension, such that they could end up with a weekly state pension of £200 or more from a combination of a basic pension and an additional state pension.
It was the value of this additional state pension that family lawyers and the courts traditionally included in the figures when considering the appropriate financial provision on divorce. A valuation could be obtained if the client completed a form BR20 and sent it to the Department of Work & Pensions (DWP). The additional state pension was also capable of being shared on divorce, albeit it was not particularly common to do so.
By contrast, under the new system there is simply one state pension. If a person contributes for at least 35 years at the full rate of national insurance, they will get the full rate of the new state pension, currently £155.65 per week. The basic state pension and additional state pension have been consolidated. For those on the new scheme, the additional state pension therefore no longer exists and as such cannot be shared on divorce.
Three different systems
We currently have three groups of people who are subject to three different sets of rules.
1. The first is people who reached state pension age before 6 April 2016 (women born before 6 April 1953 and men born before 6 April 1951). They receive the old state pension and the rules for them remain the same. If your client falls into this category, you still request a valuation of their additional state pension using a BR20. It is also still possible to share that additional state pension on divorce.
2. The second group are those who started paying NIC after 6 April 2016. They are likely to be young, or to have moved to the UK recently. These people will be purely on the new scheme and so will not have any historic additional state pension to value. There will be no pension share available
3. The third group are those people who started paying NIC before 6 April 2016, but had not reached state pension age by that date. The majority of current clients will fall into this category. They are subject to transitional provisions which family lawyers need to understand and are the focus of this short article.
The transitional provisions
For those people whose NIC record started before 6 April 2016, their previous record will be used to calculate their “starting amount” in the new state pension. This will be the higher of either:
- the amount they would get under the old state pension rules (which includes the basic state pension and any additional state pension), or
- the amount they would get if the new state pension had been in place at the start of their working life.
Individuals with a high level of additional state pension are likely to have an amount that is higher than the new state pension. That excess is known as the “protected payment” and is paid on top of the full new state pension. It is calculated at 6 April 2016 and then effectively frozen. No further contributions can be made to it after April 2016. The amount is set and simply increases in line with the CPI. In simplistic terms, the protected payment is the person’s accrued additional state pension value calculated at April 2016, frozen, repackaged and renamed. It is the value of this protected payment that may be matrimonial property.
The method for requesting a valuation for this group of people is the same as under the old scheme. The client needs to ask DWP for a valuation; the only difference is that the form is called BR20NSP (i.e. BR20 new state pension), rather than BR20. The DWP will provide different information, depending on whether any court proceedings started before or after 6 April 2016 and whether the relevant date is before or after 6 April 2016. It is therefore crucial to provide that information to the DWP at the time of the request, to avoid the delay caused by a subsequent request. In broad terms:
- If the proceedings started on or before 5 April 2016, the old rules in relation to the valuation and sharing of the additional state pension will continue to apply. The DWP will provide a valuation of the additional state pension up to the relevant date.
- If the relevant date is on or after 6 April 2016, and consequentially the proceedings commenced on or after 6 April 2016, or have not yet commenced, the DWP will provide a valuation of the protected payment at the relevant date.
- If the relevant date is on or before 5 April 2016 but proceedings are started on or after 6 April 2016, they will provide both valuations together with some additional information.
- It is possible that the DWP will write back to say that the value of the protected payment is nil, particularly for a person who was contracted out.
In addition to obtaining a pension-sharing order, it has historically been possible to enter into a pension-sharing agreement in relation to the sharing of the additional state pension. That remains the case. Any agreement executed after 6 April 2016 will, however, be subject to the new rules and so it will be the protected payment, not the additional state pension, which is sharable.
Using a spouse’s NIC record
In the past a married person could replace their national insurance record with their spouse’s for the period of their marriage. This could help to boost a person’s basic state pension. It was most often used by women who had not worked, and was something that family lawyers sometimes suggested a client enquire about on separation to bolster their future income. The key message is that the new state pension is based purely on a person’s own contribution record and so this option has ended.
The only exception is for those women who paid the married women’s stamp, which was a reduced NIC rate. It was withdrawn to new applications in 1977, but some older women continued to pay it. The Government accepted that it would be unfair to women who had spent long periods paying the stamp in anticipation of a pension based on their husband’s national insurance record if that right was withdrawn at the last minute. The Pensions Act 2014 therefore has complex special provisions for women who paid this reduced rate in the 35 years before they reached state pension age.
If you think this may apply to your client, the first step would be for them to get a state pension statement to see how they stand. If the client did not pay the married woman’s stamp, their national insurance record may be better than expected, partly because a financial year at home with a child counts in full towards a person’s state pension under the new rules. A statement can be obtained online on the gov.uk website.
Jennifer Maciver, associate, SKO Family Law Specialists