A pension sharing order divides an ordinary pension; a pension compensation sharing order divides compensation paid by the Pension Protection Fund.

If you are comparing a pension sharing order with a pension compensation sharing order, the question is which body is paying the pension. The general choices on divorce are in what happens to your pension on divorce; this page covers only the compensation version. Legal questions go to a solicitor. Retirement income is where an FCA-authorised adviser firm comes in: a free call back follows from the form on this page.

Two orders, one test: who pays the pension

Both orders move a percentage of one spouse's pension rights to the other as part of a divorce. They differ in what is being divided. The Matrimonial Causes Act 1973 defines a pension sharing order as one that deals with "shareable rights under a specified pension arrangement" or shareable State Pension rights, and a pension compensation sharing order as one that deals with "shareable rights to PPF compensation that derive from rights under a specified pension scheme" (legislation.gov.uk, Matrimonial Causes Act 1973, section 21B; section 21A).

A defined benefit scheme whose employer has become insolvent can end up with the Pension Protection Fund (PPF). The PPF explains that once the scheme transfers, members are paid by the PPF in place of the former scheme (PPF, What it means to be a member of the PPF). Those payments are what a compensation sharing order divides. The background to the underlying pension is in the final salary pension guide and, for the PPF itself, the Pension Protection Fund explained.

Pension sharing orderPension compensation sharing order
What it dividesRights under a pension arrangement, or State Pension rightsRights to PPF compensation
Who carries it outThe scheme or provider holding the pension; see what a pension sharing order isThe Board of the Pension Protection Fund

How the Pension Protection Fund divides compensation

The PPF's member guidance describes the order as "a court order splitting the compensation you’re entitled to between you and your ex-spouse or ex-civil partner, who’ll then become a PPF member with their own entitlement to compensation when they retire" (PPF, Sharing your compensation after divorce). The Pensions Act 2008 builds this from a debit and a credit: the member's rights "become subject to a debit of the appropriate amount", and the ex-spouse "becomes entitled to a credit of that amount as against the Board" (legislation.gov.uk, Pensions Act 2008, section 111). A percentage in the order is applied to the cash equivalent of the compensation on a valuation day. The credit is called a pension compensation credit; the PPF turns it into compensation in the ex-spouse's name.

The PPF's booklet Sharing your compensation (print code PPF03 July 2024) sets out the practical steps. It says the member or their legal representative should ask for a cash equivalent value, the compensation expressed as a cash sum, and that the PPF values it at the date of calculation unless Scottish law applies. It encourages sending in a draft order before it is finalised. Its news page adds that it will say within 21 days whether it can implement the terms, and "We don’t charge you for checking the draft documents". A cash equivalent value and implementing the order are also free.

What happens next depends on where the member is:

  • Not yet receiving compensation. The PPF splits the entitlement as the court directs. The ex-spouse becomes a PPF member, entitled to payments from the normal pension age of the former scheme, and can choose to retire early or later.
  • Already receiving compensation. The PPF reduces the member's payments straight away, as the order sets out. The ex-spouse becomes a PPF member with their own entitlement, paid from the former scheme's normal pension age, or immediately if they have reached it; the July 2024 booklet adds that they can retire early "if 55 years old or over".

The law gives the PPF four months, starting from the later of the day the order takes effect and the day it holds the documents it needs (Pensions Act 2008, section 115), although it "normally takes much less time".

When the order can be made, and what cannot be shared

In England and Wales the court can make a compensation sharing order on or after a divorce order, but it does not take effect until that order is final (Matrimonial Causes Act 1973, section 24E). For later applications, see after decree absolute.

The PPF says an assessment period starts when an employer becomes insolvent and "has to be completed before a scheme can be taken over, or 'transfer', to us" (PPF, What happens if your employer becomes insolvent). If the divorce came before the transfer and an ordinary pension sharing order had not been implemented by then, the PPF's booklet says it will "implement it and calculate your compensation" as the court ordered. The sources we read do not say whether a compensation sharing order can be made while a scheme is being assessed; that is a question for a solicitor.

Section 24E also sets limits. A compensation sharing order cannot be made for compensation that is already the subject of an attachment order, that comes from a scheme whose rights were shared between the same couple, or that has already been shared between them. The regulations add that survivor compensation already in payment is not shareable (Pension Protection Fund (Pension Compensation Sharing and Attachment on Divorce etc) Regulations 2011, regulation 2).

The Financial Assistance Scheme (FAS) works differently. Its divorce FAQs say that under the FAS regulations "it is not possible to share your FAS Assistance as part of a divorce settlement", and that while it will honour a pension sharing order made up to the date of the scheme wind-up, orders "not implemented by the trustees prior to your former pension scheme transferring to the FAS will not be recognised" (FAS, Divorce FAQs). An earmarking order is the other route: the PPF's booklet says the ex-spouse does not become a PPF member and the member stays liable for income tax on the whole amount; see sharing compared with earmarking.

Which order to seek is a legal matter. Testing the income each outcome leaves is different: an FCA-authorised adviser takes that up by phone, at no cost, after you fill in this page's form.

Compensation sharing in Scotland

The sections above describe England and Wales. In Scotland, the Family Law (Scotland) Act 1985 lists both orders among those a court can make: "(baa) a pension sharing order", "(bab) a pension compensation sharing order" and a separate order under section 12B(2) (legislation.gov.uk, section 8). Under section 12B, where a capital sum is awarded, the court may also require the PPF to pay "the whole or part" of a payment of compensation to the other party when it falls due to the liable person.

The PPF's booklet notes practical differences. It values compensation at the "relevant date", usually the date of separation or when one of you moved out of the home, and where the marriage does not cover the whole of the service in the former scheme, the legal representative must apportion the cash equivalent "on a pro rata basis". The documents must reach the PPF within two months of the date of the divorce, dissolution or annulment; otherwise an extension is needed from the court, and without one the order is treated as "never having taken effect" (Pensions Act 2008, section 110). Wider Scottish rules: pensions on divorce in Scotland and Northern Ireland.

Getting help with a compensation sharing order

  • A solicitor advises on which order to seek and drafts it.
  • The PPF gives the cash equivalent value and checks draft terms at no charge.
  • A pensions on divorce expert can help with complicated figures; see when you might need one.

Costs are covered in what a pension sharing order costs. Whoever handles the legal route, the form on this page puts the income questions that follow to an FCA-authorised adviser.

Frequently asked questions

What is a pension compensation sharing order?

It is a court order that divides the rights to Pension Protection Fund compensation between divorcing spouses, using a percentage. Section 21B of the Matrimonial Causes Act 1973 defines it.

What is a pension compensation credit, and is it the same as a pension sharing order credit?

The ex-spouse's right to a share of compensation is called a pension compensation credit in the Pensions Act 2008. It is created by the compensation order, not by an ordinary pension sharing order, and the PPF converts it into compensation in the ex-spouse's name.

Can both orders be made on the same pension?

Section 24E says a compensation sharing order cannot be made for compensation that comes from a scheme whose rights were already shared between the same spouses. Ask your solicitor how that applies to your case.

Sources