Divorcees may need to take action to protect benefits following pension reforms
An unintended consequence of the pension reforms is that any divorcee with a pension earmarking order may need to act fast to protect their benefits. Any earmarking order which provides the ex-spouse with a fixed percentage of the pension income in retirement should be checked to ensure benefits are protected now that the member no longer needs to take their pension as an income and can instead take all the cash out as a lump sum.
Second biggest asset
Pension funds are often the second biggest asset people have outside their main family home. It is therefore unsurprising that they often form part of a divorce settlement. There are two main ways people can use their pension fund in a divorce settlement. They are:
• Pension earmarking: this is where a fixed percentage of the member’s pension benefits are earmarked for the ex-spouse, but the pension stays with the member. Once the member reaches retirement and starts taking the pension benefits, the ex-spouse will also start to receive the benefits earmarked for them. They will receive a fixed percentage of either the pension income or the tax-free cash lump sum, or both. (In Scotland, earmarking only applies to the tax-free cash lump sum.)
• Pension sharing: this is where a cash equivalent transfer value on the member’s pension is allocated for the ex-spouse. This could result in the ex-spouse transferring these benefits straight into a pension in their own name, creating a clean break.
New pension freedoms impact
Pension sharing is the more popular method used today. However, before pension sharing was available, a number of people would have set up pension earmarking orders. These people now need to check how the new pension freedoms impact them.
Entire pension withdrawal as cash
If a divorcee has a pension earmarking order which pays them a fixed percentage of the pension income, they should check immediately to see if their rights are protected if the member decides to withdraw their entire pension as cash and not take a pension income. If the member takes the entire pension as a cash lump sum, the ex-spouse may not receive their correct entitlement. If the wording on the earmarking order does not protect them from this, they should seek advice from a solicitor or accredited pension specialist to ascertain whether they can make an amendment to the order.
Right to retirement income
A number of people may have set up pension earmarking when it first became possible, around 20 years ago, and the majority of these orders would have been for the benefit of the ex-wife. It is important that these women act promptly (especially if their ex-husband is approaching retirement age) to check their earmarked rights are protected. They need to ensure that where they have a right to a percentage of the retirement income, they receive the same benefit if their ex-husband takes all the pension money out as cash instead of as an income.
Reforms could impact on some people
Earmarking orders have not been the major choice since pension sharing orders became available in December 2000. However, it is possible that the reforms could impact on some people. Anyone with an earmarking order that is still in force should consider their position.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.