Divvying Up the Pensions Pot
Divorce has been rated as the second most stressful event in human life after bereavement. So it is hardly surprising that, when divorce is combined with divvying up the pensions pot, it gets even more stressful.
Including pensions in a divorce settlement can be long, time consuming, expensive and an extremely complicated process. For affected individuals it is likely to end in tears and frustration.
There is no mandatory allowance for pension rights in divorce under UK law.
Possibly the best approach is to leave pension rights alone and adjust the distribution of further marital assets. Of course, while this may be simplest from a pension prospective, there will usually be other issues to complicate the matter. If this set-aside approach is not possible and pension rights are to be divided as part of the settlement, things start to get complicated. The law provides two routes for dealing with pension rights when a pension is split as part of a divorce settlement.
The two approaches are:
- Pensions Earmarking, and
- Pension sharing {or splitting}
The process is further complicated when the divorce is lodged in Scotland.
For large pension schemes, they will usually have robust procedures in place to navigate them through the minefield of divorce legislation and will be adept at dealing with such cases. However, for small schemes where there are relatively few cases, procedures will typically be less well tested.
Pensions Earmarking Order
Under a Pension Earmarking Order, the member’s retirement pension and/or any lump sum payable on retirement or death can be “earmarked” for the benefit of the former spouses. This approach generates a number of issues for both parties.
- There is no legal transfer of ownership or control of benefits to the former spouse who remains dependant on the member’s decisions regarding the benefits.
- The member remains liable for income tax on the total pension paid.
- Entitlement to earmark benefits may be lost if the former spouse remarries.
- The two parties must remain in some form of contact.
On the positive side, earmarking can apply to lump sum benefits, which is not possible under the alternative route of pension sharing {under Scottish rules, a spouse who remarries retains right to earmarked benefits}.
Pension Sharing Order
Pension Sharing Order works on the principal of a “clean break”. Therefore once the matter has been resolved, there is no need for either party to contact one another ever again.
As always, there are some complications and both member and former spouse may incur higher fees than under an earmarking approach. Despite this, it appears to be a popular, yet complex approach.
Differences Between English and Scottish Law
All parties involved need to know if the divorce case has been lodged in England or Scotland. An English court will have jurisdiction if either party to the marriage is domiciled in England and Wales on the date when the proceedings are begun. Or if either party was habitually resident there for one year ending with that date. If the divorce proceedings were lodged in Scotland there are some differences in pension sharing on divorce. The major differences are as follows:
- Information must be calculated at different dates.
- Scottish courts only take account of benefits earned during the period of the marriage. In England, all accrued benefits are taken into consideration.
- In Scotland, the Order can specify the percentage value of the amount to be transferred. In England it can only be a percentage value.
- In Scotland, earmarking can only apply to lump sum benefits {either on retirement or death} and not on pensions.
- In Scotland, pension sharing can be brought into effect by either a Court Order or a qualifying agreement.
- Trustees of pension schemes can decide whether or not to allow former spouses with pension credits into their scheme. Even where a decision has been made, it may be reviewed and overturned at a later stage.
- Parties to divorce need to decide whether/to what extent to include pension rights in their split of assets. The lawyers and IFAs that they instruct may further influence this outcome in a positive way - after all, a pension scheme is often one of the largest assets that a person owns and is imperative to choose a seasoned adviser who understands the distinction between splitting and earmarking.
- IFAs advising the spouse of the pension scheme member may need to decide whether their client should keep their pension credit in the member’s pension scheme {if allowable} or put the pension credit into another suitable vehicle. If another vehicle is advisable, which one?
- IFAs and the member that they are instructed to advise may have conflicting views on how to approach the issue. Any differences will need to be overcome before tackling the issue. Members may also require advice on future pension provision, now that a chunk of their own scheme has gone, as well as other areas such as life cover. If divorce and pensions is likely to affect you, it is always worth investigating the pros and cons before rushing into anything.
Decisions, Decisions
You might be forgiven for thinking that the procedures do not seem that daunting. However, there are many decisions along the way that can slow or even bring the entire process to a halt;