Pension Earmarking.

Pension Attachment Orders and Pension Sharing After Divorce

Pensions are often among the most valuable assets considered during divorce proceedings. In some cases, they may be worth more than the family home.

There are several ways of dealing with pensions following divorce, including pension sharing, pension attachment and offsetting. Each option has different legal, financial and tax consequences.

Anyone who has an older pension attachment or earmarking order should understand exactly what it covers and how it may be affected when the pension holder chooses to take their benefits.

What Is a Pension Attachment Order?

A pension attachment order, previously known as a pension earmarking order, requires a pension provider to pay part of a pension member’s benefits to their former spouse or civil partner.

The order may attach a percentage of:

• Pension income
• A pension commencement lump sum
• Certain death benefits

The pension remains legally owned by the original pension scheme member. The former spouse does not receive a separate pension fund in their own name.

What Is a Pension Sharing Order?

A pension sharing order divides pension rights between former spouses or civil partners.

A specified percentage of the pension is transferred for the benefit of the person receiving the pension share. Depending on the scheme, this may create:

• A separate pension within the same scheme; or
• A pension credit transferred into another suitable pension arrangement.

The recipient then has pension rights in their own name and is generally able to make retirement decisions independently of their former spouse.

Why Is Pension Sharing Usually Preferred?

Pension sharing commonly provides greater certainty and allows both parties to achieve a cleaner financial separation.

Once implemented, the recipient’s pension is normally independent of:

• When the former spouse retires
• How the former spouse takes their pension
• The former spouse’s death
• The former spouse’s future financial decisions
• The recipient’s remarriage

A pension sharing order therefore often fits more comfortably with the court’s objective of achieving a clean break where it is fair to do so.

How Does Pension Attachment Differ?

Under a pension attachment order, the recipient usually has to wait until the pension member decides to take the relevant benefits.

This can create uncertainty because the pension member may:

• Retire earlier or later than expected
• Choose a different form of pension benefit
• Transfer the pension to another scheme
• Take flexible withdrawals rather than a regular income
• Die before or after retirement

The recipient does not normally control those decisions, although the pension provider must comply with the terms of the court order.

Can Pension Freedoms Defeat an Attachment Order?

The pension freedoms introduced in 2015 allow many people with defined contribution pensions greater choice over how they take their benefits.

Options may include:

• Taking the whole fund as a lump sum
• Taking a series of lump sums
• Using flexi-access drawdown
• Buying an annuity
• Leaving the fund invested

The existence of these options can affect how a pension attachment order operates, particularly where the order was drafted before flexible pension access was available.

However, a pension member cannot necessarily avoid an attachment order simply by choosing to withdraw the pension differently. The pension provider should identify the order and apply it to the relevant benefits in accordance with its wording.

The difficulty is that an older order may attach only a particular type of income or lump sum and may not clearly address newer methods of taking pension benefits.

Why the Wording of the Order Matters

A pension attachment order should specify which benefits are attached and the percentage or amount payable to the former spouse.

For example, an order attaching a percentage of pension income may operate differently from an order attaching part of the tax-free lump sum.

Older orders may need careful interpretation where the scheme member intends to use drawdown, transfer the pension or take an uncrystallised funds pension lump sum.

The pension scheme cannot simply rewrite the order to deal with circumstances that were not anticipated when it was made.

Can the Pension Member Decide When Payments Begin?

Usually, yes. Payments under an attachment order generally do not begin until the pension member accesses the relevant pension benefits.

The recipient may therefore have no pension income from the order if the member delays retirement or leaves the fund untouched.

This is one of the principal disadvantages of pension attachment when compared with pension sharing.

What Happens if the Pension Is Transferred?

A pension attachment order should be disclosed when pension rights are transferred to another arrangement.

The pension member and receiving scheme may need to consider how the existing order will operate following the transfer.

A transfer should not be undertaken without checking:

• Whether the receiving scheme will accept the pension
• How the attachment order will be administered
• Whether the transfer changes the benefits available
• Whether the former spouse must be notified
• Whether further court directions are required

Anyone affected should obtain legal and regulated financial advice before the transfer is completed.

What Happens if the Pension Member Dies?

Pension income attached for the benefit of a former spouse will commonly stop when the pension member dies.

An order may separately attach certain death benefits, but this depends on the terms of the order and the rules of the pension scheme.

A pension sharing order is generally more secure in this respect because the recipient owns a separate pension entitlement which does not normally disappear when the former spouse dies.

What Happens if the Recipient Remarries?

An attachment of pension income will usually end if the person receiving it remarries.

The treatment of attached lump sums and death benefits can be different and will depend on the wording of the order and the applicable legislation.

By contrast, pension rights already transferred under a pension sharing order are not normally lost because the recipient remarries.

Tax on Pension Attachment Payments

Tax treatment can be an important disadvantage of pension attachment.

Pension income is generally taxed as income of the pension scheme member before the attached amount is paid to the former spouse. This can produce an unfair or unexpected result where the two parties pay tax at different rates.

With pension sharing, the recipient is normally taxed on benefits taken from their own pension arrangement.

Tax advice should be obtained because the precise treatment will depend on the pension, the type of benefit and the parties’ circumstances.

What Is Pension Offsetting?

Pension offsetting allows one person to retain more or all of their pension while the other receives a greater share of different assets, such as the family home or savings.

For example, one spouse might keep a pension while the other receives a larger share of the equity in the family home.

Offsetting can avoid the need for a pension order, but comparing pensions with immediately available capital is not straightforward.

A pension may have different tax treatment, risk, accessibility and long-term value from a house or cash investment. A simple comparison using the pension’s cash equivalent transfer value may not produce a fair result.

Defined Benefit Pensions

Defined benefit or final salary pensions can be particularly difficult to value.

The cash equivalent supplied by the scheme may not accurately represent the cost of replacing the promised retirement income.

Specialist pension-on-divorce advice may be needed where the case involves:

• A final salary pension
• A public-sector pension
• An armed forces pension
• A police or NHS pension
• A pension already in payment
• A substantial difference in age or life expectancy
• Early retirement or ill-health benefits

Should an Existing Attachment Order Be Reviewed?

Anyone benefiting from or subject to an existing pension attachment order should obtain a current copy of the order and ask the pension provider how it will apply.

Relevant questions include:

• Which pension benefits are attached?
• What percentage or amount is payable?
• When will payments begin?
• What happens if flexible benefits are taken?
• What happens if the pension is transferred?
• What happens on death or remarriage?
• How will tax be deducted?

The pension provider can explain how it administers the order, but it cannot normally provide legal advice about whether the order remains appropriate.

Can an Attachment Order Be Changed?

In some circumstances, an application may be made to vary or discharge a pension attachment order.

Whether a change is possible or appropriate will depend on factors including:

• The wording of the existing order
• The wider divorce settlement
• Changes in the parties’ circumstances
• Whether the pension has already been accessed
• The rules of the scheme
• Whether another type of financial order would now be fair

It may not always be possible simply to replace an attachment order with a pension sharing order. Specialist advice should be obtained before making an application.

Obtaining Pension Information During Divorce

Both parties should disclose all pension rights as part of the financial proceedings.

Information may be required about:

• The pension’s cash equivalent value
• Projected retirement income
• Normal and early retirement ages
• Tax-free lump-sum rights
• Death benefits
• Guaranteed annuity rates
• Additional voluntary contributions
• Existing attachment or sharing orders
• Scheme implementation charges

The court cannot make a properly informed decision if pension information is incomplete or out of date.

When Does a Pension Sharing Order Take Effect?

A pension sharing order does not take effect immediately when the judge approves it.

It becomes effective only after the relevant divorce stage and appeal period have passed. The pension provider then has a statutory implementation period, normally up to four months after receiving all necessary documents and payment of any required charges.

The parties should check that the order has been received and implemented rather than assuming that the pension was divided automatically.

Do Not Finalise the Divorce Too Soon

Applying for the final divorce order before financial and pension arrangements have been resolved can affect certain pension and death benefits.

In some schemes, rights available to a spouse may end when the marriage legally ends.

Legal advice should therefore be obtained before applying for the final order where pensions remain unresolved.

The Importance of Specialist Advice

Pensions should not be treated as ordinary savings. Their value depends on factors including age, investment risk, inflation protection, tax, retirement options and scheme guarantees.

A family law solicitor can advise about the form and legal effect of a pension order. A regulated financial adviser or pension-on-divorce expert may be needed to compare the available options and calculate a fair division.

Anyone with an older pension attachment or earmarking order should seek advice before either party accesses, transfers or restructures the pension.

Important Information

Solicitors.com is not a firm of solicitors. This article is provided for general information only and does not constitute legal, pension, tax or financial advice. Pension and divorce law, scheme rules and tax treatment may change, and their application will depend on the individual circumstances. You should seek advice from a suitably qualified family law solicitor and regulated financial adviser before taking or refraining from action.