External pension sharing: how your share becomes a pension of your own

A pension sharing order settles who gets what on paper. In England and Wales, it usually expresses the transferee's share as a percentage; Scotland has a different framework and can use different documents and fixed amounts. Implementation is where it actually happens - and when your share is dealt with 'externally', it means starting a pension of your own.

A pension sharing order does not move any money by itself. It instructs a pension scheme to give one person - the transferee - a share of the other's pension, usually expressed as a percentage in England and Wales. Turning that instruction into an actual pension is called implementation, and the scheme has a fixed period in which to do it. There are two ways it can be handled, internally or externally, and the difference matters a great deal for what you end up with.

With internal implementation, your share stays inside your former partner's scheme. You become a member in your own right - often called a 'pension credit member' - and that scheme pays your benefits when the time comes. With external implementation, the opposite happens: your share is paid out of that scheme and transferred into a separate pension in your name, which you then own and control.

Which route applies is usually set by the scheme's rules rather than chosen by you. Many private-sector and funded schemes implement externally; a number of public-sector schemes, such as the NHS and teachers' schemes, keep members internally. Some schemes offer a choice - and where they do, it is a significant decision, because the two routes produce very different kinds of pension.

When your share is implemented externally, the scheme calculates the cash value of your percentage - your 'pension credit' - and transfers that amount to a receiving pension of your choosing. From that point, the money is yours: it sits in your own pension, invested as you decide, entirely separate from your former partner. The tie to their scheme is cut cleanly, which is one of the appeals of the external route - a genuine clean break, with no ongoing financial connection to wait on or worry about.

With an external share, you generally get to nominate a qualifying pension arrangement to receive the credit. Some personal pensions, SIPPs and workplace schemes may accept pension credits, but provider acceptance must be confirmed before a receiving arrangement is selected. You will usually be asked to nominate a receiving scheme within a set time; if you do not, the implementing scheme may use its own procedures for discharging the credit, which can leave you with less choice.

It is worth weighing a few things when choosing where your credit lands:

• Whether the provider will accept this particular pension credit and any conditions it applies.
• The charges, and the range of investments on offer.
• Whether later consolidation is permitted and whether any valuable rights or protections could be lost.
• The receiving scheme's death-benefit and beneficiary-nomination rules.

This is a stage where regulated advice can be valuable, particularly if the pension credit is large, the receiving options differ materially, or you are unsure how it should be invested.

The scheme generally has four months to implement the order, but only once it has received the effective order, the prescribed information and documents, and any required charges. Schemes may charge for implementation, particularly for more complex or public-sector arrangements, and the order usually states how those charges are divided. Supplying documents promptly and paying required charges can help prevent avoidable delay, although delays may also arise within the scheme.

In England and Wales, a pension sharing order is normally expressed as a percentage, not a fixed sum, so the amount transferred is not necessarily locked in on the date of the order. For money-purchase pensions, market movements can affect the amount transferred. For defined benefit and public-service pensions, the scheme's valuation basis, factors and calculation date may affect the pension credit value. The headline figure available when the order is made may therefore differ from the amount ultimately implemented.

Moving a pension credit into a receiving pension is not normally a taxable event. Access to the pension credit benefits will depend on the receiving scheme, the source of the credit and any protected pension age or other special rights. Tax-free cash treatment can differ where a credit derives from a pension already in payment, and a pension credit may carry valuable allowance protections. These points should be confirmed before the receiving arrangement is selected.

External implementation turns your share into a pension in your own name, and that cuts both ways. Where it is held in a money-purchase arrangement, you decide how it is invested and carry the investment risk. Consolidation with other pensions is subject to provider acceptance and checks that valuable rights or protections would not be lost. You can normally nominate intended beneficiaries, subject to the receiving scheme's rules and applicable tax law. Compared with an internal defined benefit credit, you may give up a scheme-backed income with increases set by the scheme rules. Neither route is universally better, and the available route is often determined by the scheme.

We help you make the most of an external pension credit: choosing a suitable pension to receive it, getting it invested in line with your plans, and building your wider retirement picture around it. We don't implement the order - that's the scheme's job - and we don't advise on defined benefit transfers, but where your share is landing in a pension of your own, we can help you set it up well.