Advertorial: Divorce & Pensions: What Are Your Rights?
Advertorial from St James's Place Retirement Planning: In 2010 119,689 couples were divorced. (Source: Office for National Statistics, Dec 2011). Most divorce cases will result in a court making financial provision orders adjusting the property rights of the divorcing couple and, for many divorcing couples, pension rights will be the largest asset after the marital home. However, it is only since 1 August 1996 (the effective commencement date for S166 of the Pension Act 1995) that pension rights have had to be taken into account when considering financial provision on divorce.
Initially pension assets were taken into account by the ‘earmarking provisions’. While these provisions were a major step forward as they meant that an individual could receive a benefit from their former spouse’s pension, ‘earmarking’ orders had a number of disadvantages. Further legislation in the Welfare Reform and Pensions Act 1999, which was effective from 1 December 2000, finally introduced ‘pension sharing orders’ for all divorce (and nullity) proceedings that commenced on or after 1 December 2000.
Couples who started divorce (or nullity) proceedings after this date do not have to use pension sharing, but can use any of the ways that pension rights can be taken into account – splitting, offsetting and earmarking.
Since 5 December 2005 the Civil Partnership Act 2004 has enabled same-sex couples to obtain legal recognition of their relationship by forming a civil partnership. As a result of this, civil partners will be subject to the same legal rights and responsibilities if a civil partnership is dissolved as if a marriage is dissolved. For the purposes of this article ‘ex-spouse’ also covers ‘former civil partner’.
How does Earmarking work in practice?
For divorce actions that commenced before 1 December 2000, divorcing couples had the choice of either offsetting the pension rights against other assets in the financial settlement, or by making them subject to an earmarking or attachment order, in which case a ‘clean break’ was not available.
Earmarking orders can provide for the payment of a lump sum or pension, and can vary the disposition of lump sum benefits. An earmarking order will not make an ex-spouse a member of a pension scheme in their own right. In effect it is only a payment mechanism, requiring trustees or managers of pension schemes to pay a proportion of the member’s benefits directly to the exspouse.
Where an earmarking order has been issued and the member subsequently transfers to another scheme (or personal pension), the earmarking order also transfers to the other scheme. The courts are also given a wide power to direct payment of all or part of any lump sum death benefits, overriding any discretion given to the pension scheme trustees.
However, earmarking has its weaknesses:
- Earmarking does not allow a clean break as the ownership of the pension remains with the original member. The ex-spouse therefore needs to keep the trustees of the member’s scheme advised of any changes in their circumstances (eg. change of address, remarriage etc),
- The payment of the earmarked pension benefits can only start when the member takes benefits and the ex-spouse cannot force a member to take benefits at a set date,
- The payment of the earmarked pension benefits ends when the member dies,
- If the ex-spouse predeceases the member, any earmarked pension benefits automatically revert to the member,
- A pension earmarking order (but not a lump sum order) automatically lapses if the exspouse remarries,
- The earmarked benefits are treated as part of the member’s benefits for the purposes of the Lifetime Allowance,
- The earmarked pension might be taxed as income of the member with no tax is payable on this income by the ex-spouse.
How does Pension Sharing work in practice?
Pension sharing was introduced to allow divorcing couples a ‘clean break’ solution by transferring pension rights from one of the divorcing couple to the other. The ex-spouse ‘owns’ the entitlement to the benefits and is able to choose where to invest their share and, subject to Scheme Rules and overriding legislation, when and how to take benefits.
A court in England and Wales can only make a pension sharing order when one of the divorcing parties were domiciled in England and Wales on the date of the statement of marital breakdown, or habitually resident in England and Wales throughout the preceding year. In addition, no UK pension provider is obliged to comply with a pension sharing order made against it by a court outside the UK. The types of pension that can be covered by a pension sharing order include:
- All individual pension arrangements, including personal pensions, stakeholder pensions and retirement annuity contracts,
- All employer sponsored pensions, whether funded or unfunded, including S32 buy-outs, inhouse AVCs and Free Standing AVCs and whether active, deferred or pensioner member,
- SERPS / State Second Pension.
- The basic state pension
- Widow(er)’s and dependants’ pensions already in payment (including cases where benefits are being taken by income drawdown),
- (In Scotland) benefits accrued outside the period of marriage.
The pension benefits will be valued at a date chosen by the pension scheme administrator, although this must be within three months of the member’s request. The value of the pension rights will be the Cash Equivalent Transfer Value (CETV), rather than the current value.
A pension sharing order will not necessarily be based on a 50:50 split. The exact amount will vary depending on the financial agreement. However, in England, Wales and Northern Ireland the pension sharing order will be expressed as a percentage of the member’s CETV under the scheme, rather than as a specified amount. In Scotland the order may be expressed as a percentage of the CETV or a specified amount.
The pension sharing order applies equally to all of the member’s benefits under a scheme (including any pensions already in payment). Therefore if an order indicated that 60% of the member’s benefits were to be shared, this would apply to benefits under the scheme and to any in-house AVCs where they are part of the main scheme.
That part of the pension that the scheme member gives up is known as a ‘pension debit’, while the amount that the ex-spouse receives is referred to a ‘pension credit’.
There are two ways in which the ex-spouse may be granted their pension credit. They may either become a member of the existing pension scheme or transfer the pension credit to a scheme of their choice. All personal pension, stakeholder and funded occupational pension schemes must offer the ex-spouse the choice of transferring the pension credit and can choose whether or not to grant the ex-spouse membership of the scheme. Unfunded public sector schemes can only offer transfers if the scheme is closed and the pension credit can be accepted by another public sector scheme. In practice most private sector defined benefit schemes are unlikely to offer membership to the exspouse due to the ever-increasing costs of maintaining defined benefit liabilities.
Where the member has a unit linked arrangement, subject to the scheme rules, the member can choose the particular fund or funds, policy or policies, which are encashed to provide the pension credit.
This article was made possible by St James's Place Retirement Planning
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