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Pension earmarking & attachment orders

What is a pension earmarking order?

Pension earmarking refers to an attachment order made by the court which requires a proportion of the pension benefits to be paid directly to an ex‑spouse/former civil partner, instead of to the member. This method was introduced under the Pensions Act annulment and judicial separation. It is in effect a form of deferred maintenance. The benefits continue to be held in the original member’s plan until the member starts drawing an income (and/or when they die), when the benefits will be paid to the respective parties in the proportions required by the earmarking order.

Earmarking orders in England, Wales and Northern Ireland may be made against a member’s:

  • Pension commencement lump sum
  • Pension income
  • Death-in-service lump sum death benefits

In Scotland, only the tax-free cash lump sum and lump sum death benefits can be earmarked rather than pension income.

The amount is specified at the time of the divorce but either party can apply to the court to have the amount varied. In practice, an agreement in principle is likely to be made between the parties before being ratified by the courts. Earmarking cannot take place without the courts’ involvement.

How does earmarking work?

As an example:

An attachment order could be added to a member’s pension stipulating that when they retire and draw income from the pension, 50% of the income they receive must be paid to their ex‑spouse/former civil partner.

Where an earmarking order includes lump sum death benefits, the order can compel the inclusion of the ex‑spouse/former civil partner as a beneficiary, thereby overriding the normal discretion that administrators/trustees have over the selection of beneficiaries who receive death benefits. This power does not extend to the redirection of dependant’s pensions on the member’s death.

State Pension benefits, including State Second Pension (S2P), cannot be made the subject of earmarking orders. While a divorced person can claim the contribution record of the ex‑partner for the basic State Pension, it is not possible to do the same for any state earnings related pension scheme (SERPS)/(S2P) benefits. This will also not be possible for the new single-tier State Pension, although pension sharing will be available if there is a protected payment.

If the member subsequently transfers any of their pension benefits that have been subject to an earmarking order, the scheme trustees would have to inform the new trustees/providers of the earmarking order. They must also notify the ex‑spouse/former civil partner within 21 days of the transfer.

When the member dies after commencing benefits, the pension to the ex‑spouse/former civil partner will also cease. There are normally no subsequent widow’s benefits either, though this could be included in the earmarking order, particularly if the ex‑spouse/former civil partner was clearly financially dependent on the member pre-divorce.

The court could decide, as in the case of T v T1, to defer deciding on an earmarking order until nearer the member’s actual retirement date.

Benefits of pension earmarking
  • It allows for both the tax-free cash benefit and the pension income benefit to be earmarked
  • Death-in-service benefits can also be earmarked
  • An earmarking order may be used in cases of judicial separation, not just on divorce
  • If the member transfers pension rights, the earmarking order will follow the member’s rights to the new arrangement
  • The ex‑spouse/former civil partner is not reliant on their ex-partner to arrange payment but rather on an independent third party
  • The ex‑spouse/former civil partner will have some provision in retirement
Drawbacks of pension earmarking
  • It does not allow a clean break between the divorcing couple and the couple may need to keep in touch many years after the divorce
  • The ex‑spouse/former civil partner will need to keep the scheme trustees advised of any changes in his or her circumstances
  • Earmarking orders in respect of pension benefits (including a pension in payment) cease on the remarriage of the party receiving the award
  • If the member or ex‑spouse/former civil partner dies, the earmarking order/payments of any pension will cease
  • Where benefits are defined contribution, the investment risk profile of the member and/or the objectives at retirement may be different to those of the ex‑spouse/former civil partner. This can cause serious issues if the member has a high‑risk strategy and a market crash leads to a significant fall in the fund value near retirement, thereby reducing the resulting benefits just as they are due to be paid
  • The basis of benefits under the member’s scheme may change between the time the court order on divorce is made and when the member retires, so there is no certainty for the ex‑spouse as to how much they will receive
  • There can be no certainty over when the member will draw his or her benefits, if at all. The earmarking order cannot require the member to draw such benefits on a particular date
  • Any earmarked pension benefit payable to the ex‑spouse/former civil partner is treated as part of the member’s pension entitlement for lifetime allowance purposes
  • The member retains the liability for the income tax on the whole pension, even the part of the pension that is earmarked to the ex‑spouse/former civil partner, meaning they may have to pay tax on an income they will not be in receipt of. (If the member is a higher‑rate taxpayer this may be particularly disadvantageous for both parties as the pension the ex‑spouse/former civil partner receives will be net of tax based on the member’s tax position)
  • Although there is no further tax liability on the ex‑spouse/former civil partner in relation to the income received, the ex‑spouse/former civil partner cannot reclaim the tax deducted, even if they are a non‑taxpayer
  • The form of benefits provided to the ex‑spouse must match those taken by the member
  • On the whole, as a remedy it is largely unsatisfactory and is seldom used in recent years, in view of its inherent drawbacks

Pension & Divorce

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Pension offsetting

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Pension sharing orders

Read our FAQ page surrounding pension sharing orders.

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Important information:

The suitability of various options for pensions on divorce will depend on the particular circumstances of each individual. Different options may have different effects for tax purposes, different implications for pension provision and different impacts on other assets and financial planning, as well as different legal impacts on the distribution of assets on divorce.

This page provides information and is only intended to provide an overview of the current law in this area as at December 2019 and does not constitute financial advice, tax advice or legal advice, or provide any recommendations. This is a complicated area, and individuals going through a divorce should take tailored, appropriate advice about their financial settlement on divorce and future tax and financial planning.

Tax limits, allowances and rules are often subject to change and may change in future. Individuals should check that tax limits, allowances and rules have not changed.