Understanding Options
Understanding Attachment
If the parties wish to equalise the pension income payable to them, then an Attachment Order (otherwise known as Earmarking) means that the pension rights of the pension scheme member can be marked for the benefit of the other spouse.
It is effectively maintenance payments that are deducted by the pension provider from the members pension before payment and then paid directly to the former spouse.
The member will continue to ‘own’ the pension rights.
It is possible to have a combination of Attachment Orders and Pension Sharing Orders but only on different pension arrangements.
It is not possible to have an Attachment Order placed on the same pension arrangement as a Pension Sharing Order from the same marriage.
Attachment Orders have not been that popular because they are sometimes considered to have some significant drawbacks – these include
The absence of a ‘clean break’ which allows the parties to put the former marriage completely behind them.
The fact that the order can be varied – and stopped completely in some circumstances
Probably most importantly that the income payments may cease on the non-members remarriage and / or the death of the member
But an Attachment Order may in some circumstances be the most appropriate way of dividing the net income accurately if this is the preferred option, and it is worthwhile knowing about it as an option.
Both parties may agree to an element of Attachment even where a clean break is achievable, and request that the court issue an Order.
The court may make an order addressed to the Trustees that directs:
The scheme Trustees pay all or part of the member’s pension to the ex-spouse as a periodical payment Order.
The scheme Trustees pay all or part of the member’s tax-free cash sum to the ex-spouse.
The scheme Trustees pay all or part of the member’s death in service lump sum to the ex-spouse. This could possibly be important if the death benefits are held under a separate arrangement to the pension benefits as then an attachment order can be obtained as well as a pension sharing order.
An application must be made to the court for an Attachment Order.
It is the ex-spouse who must serve the order once it has been made, on the Trustees of the pension arrangement. This applies also to orders amending or revoking Attachment Orders.
The ex-spouse must keep the pension scheme Trustees informed of changes in address and bank details.
Where the details supplied earlier have ceased to have effect because the spouse has remarried or for other reasons, she/he has to give notice to the Trustees of the pension scheme within fourteen days of the event having taken place.
The pension payments do not normally continue on the death of either the member or the ex-spouse or the remarriage of the ex-spouse.
Because the pension still belongs to the member the benefits would be taxed in the hands of the member at his/her highest marginal rate of income tax before the benefits are paid to former spouse (i.e. the former spouse receives the income net of income tax.
It is very important therefore to ensure that any Attachment Order is correctly drafted so that the amount of benefit actually received after tax is as expected and it is recommended that a draft of the order is sent to the appropriate pension scheme to obtain their agreement.
If the ex-spouse dies during the payment of the Attachment Order, the payments will cease and the pension income will revert to the member in full.
This is something to consider if there are possible health issues.
Understanding Offsetting
Up until the introduction of pension sharing in 2000, offsetting was always the traditional method for the allowance of pension assets within a divorce settlement, and there may still be many circumstances in which the use of the offset is the appropriate course of action.
There may be circumstances when you do not wish to take into account your partner’s pension assets, feeling that this is “going too far” or that it is not worth the trouble, etc. Often the need to retain the matrimonial home may seem to be the priority.
In such circumstances, it is important that you are made aware of the potential loss of pension benefits and the true value of these benefits. If you still do not wish to proceed, then it is normal for there to be an exchange of letters with your solicitor (if appropriate) to confirm that it is your wish for this to be dismissed and that you are aware of the consequences of your action.
Offsetting has no effect on the member’s pension benefits.
The use of the offset does at least have the advantage of providing a clean break settlement in so far as the pension rights are concerned, and the ‘non-pension spouse’ may then have funds available immediately. It also enables the scheme member to rebuild their pension benefits without threat from the former spouse, provided that appropriate dismissal orders have been made, to prevent against future claims if there is maintenance outstanding.
No – it is possible that once the value of the pension benefits has been fully analysed (and when the loss of the state pensions is considered) that, there may be insufficient matrimonial assets to allow for a full offset to be made. A balancing attachment or pension sharing order may therefore be required.
It is possible for the benefits in one parties pension to be accounted for by an adjustment to another spouse’s interest in other assets of the marriage, such as the matrimonial home. For example, in the simplest terms the husband keeps the pension and the wife keeps the family home.
If other assets of the marriage are to be offset against pension rights then unfortunately there is no one correct method of comparing the ‘value’ of the pension rights.
If there are other assets that can be divided in lieu of the pension benefits then these can be valued on various bases, which may include
- Duxbury tables
- Ogden tables
- Cashflow projections
- Purchase Life Annuity
The Duxbury method of valuation is a mathematical set of tables aimed at identifying the capital sum required now to be invested to provide an income for the remainder of lifetime.
It relies upon certain assumptions in arriving at the offsetting lump sum required. The main assumptions being investment returns and life expectancy.
There is a risk therefore that these assumptions may not be realised which could result in the lump sum being exhausted prior to death (i.e. leaving the recipient without an income).
The Duxbury method of valuation is principally designed for the capitalisation of maintenance payments which are slightly different to the guaranteed lifetime income of a pension.
A Purchased Life Annuity is a product offered by some insurance companies that provides a guaranteed income for life (there is no risk of this being exhausted), providing a similar level of financial security as a pension annuity.
The Purchased Life Annuity is taxed in a different manner to a Pension Annuity. Whereas all of a Pension Annuity is taxed as ‘earned income’, the Purchased Life Annuity is taxed only in part (i.e. part of the income received is treated as a return of the original capital investment and as such is tax free). The interest element of the income is taxable.
However, due consideration should be given to the loss of the tax-free growth in the investment fund available within pensions up to retirement age. If the period to retirement age is six years or more, it is likely that the tax-free growth in the pension fund will outweigh the tax advantages of the Purchased Life Annuity.
With ‘higher net worth’ cases, it may be appropriate for a Chartered Financial Planner to prepare an income and expenditure program to assist with identifying the capital lump sum required to fund the client’s needs. This could also identify a client’s income requirement over a particular period for the purpose of assessing maintenance payments.
In some circumstances one party may require a greater share of the liquid ‘non-pension’ assets, such as a greater portion of the equity in the former matrimonial home to help remain in the former matrimonial home or to rehouse, and as with all negotiations the other spouse may have the ability to negotiate retaining more of their pension rights in return to help meet these objectives.
Equally the spouse with the pension rights may wish to retain them and the other spouse will look to negotiate a higher cash settlement!
The amount of ‘discount’ will partly depend on how strongly the party needs/wants to achieve their goal(s).
Discounts can vary from 15% to 60%.
Yes – a ‘non-pension’ asset with an intrinsic value of £1 is arguably worth more than £1 of ‘pension fund’.
This is since a payment of £1 into a pension fund would attract income tax relief at the individual’s marginal rate of tax (for non-tax payers the basic rate, currently 20%, would apply).
This means that having received a ‘cash’ payment the party could reinvest the money into a pension arrangement either now or in the future.
Yes – the maximum that any given individual can contribute (before age 75) in a tax year and receive tax relief is 100% of earnings, or £3,600 gross if greater – and this is further restricted to what is called the ‘Annual Allowance’ which currently is between £10,000 and £40,000, depending on personal circumstances.
Depending on the extent of the pension ‘shortfall’ and the settlement required it is possible that the other spouse will be unable to invest sufficient amounts to make this a viable option.
It is sometimes held that ‘cash in hand’ or other non-pension assets are preferable to a future income stream payable from a pension (over the longer term) given the greater flexibility and choice available.
This is often referred to as the ‘utility argument’ and can reduce the value of non-pension assets for offsetting purposes.
However, the relevance of the utility argument reduces the closer the recipient is to retirement.
Many spouses at divorce require the retention of the matrimonial home, particularly if there are children involved.
However, it is important to remember that the ‘pension’ is an important part of an overall financial planning strategy to provide financial security in retirement – and whilst this may be some way in the future it is important to consider the impact that decisions made now at this difficult time, when the attention may be more on the here and now.
If the only asset retained is the family home then it may be necessary for this to be sold in the future to provide an income to live on in later years.
At this stage, it may be appropriate to step aside from the needs to achieve a clean break on divorce, and look merely at the financial aspects of having one asset class, compared to others.
The main asset classes are as follows: –
- Cash
- UK Equities
- Overseas Equities
- Fixed interest / gilts
- Property
The rise in residential house prices has been high in recent years, coupled at the same time with low interest rates on savings accounts.
However, evidence shows that over the longer term the growth in pension funds has still outstripped residential property. More importantly a balanced portfolio can be achieved, rather than one residential house in one street at any one time!
In financial planning terms, it would be normal to recommended for a client to have a well-diversified fund over different asset classes, and in a range of investment funds that are managed by a variety of fund managers. This reduces investment risk.
We appreciate that the need of the family is paramount, however we also feel that consideration of the future needs of the spouse without pension rights should also be taken into account. As at some stage in the future this spouse will require an income to live upon in retirement. If the matrimonial home is the only asset, it may be necessary for this to be sold and the proceeds used to fund an income in retirement.
A financial adviser who specialises in divorce related matters will be able to provide you with guidance on this matter.
We can refer you to FiveWays Wealth Management or you can find a financial adviser at www.unbiased.co.uk.
Understanding Pension Sharing
Pension sharing is where on divorce the pension assets are split to provide pension rights to each party in their own right.
Once the parties are divorced and the pensions split then the rights belong to each party respectively and a ‘clean break’ is achieved.
Once a pension sharing order becomes effective it cannot be altered or reversed.
Pension sharing applies to divorce proceedings that commenced on or after 1 December 2000, with this being the date on which the petition is lodged with the Court. There is no provision for retrospective settlements.
Pension sharing is not available for legal separation purposes nor cohabitants.
It is not possible to have a “deferred” pension sharing order – i.e. an order that will become effective at a later date such as when the parties reach a given age.
This is no prescribed way in which the pensions must be split, and it is important to remember that the pensions are just another asset of the marriage – but may be either the largest or second largest asset of the marriage though!
The pensions may be split to provide equality of ‘capital value’ or ‘income’, or they may be split to meet a specific financial need.
It may be argued that benefits accrued before the time of cohabitation / marriage or after the date of separation are to be excluded, but this will depend on the circumstances of each case.
There may be an adjustment to allow for the value of other matrimonial assets retained.
There is no right or wrong way – and if the parties cannot agree then the Court will decide.
A Pension Sharing Order cannot be applied to a pension arrangement that already has an Attachment Order applied against it, regardless of whether this is from a previous marriage.
It may be possible for the attachment order to be discharged and replaced by a pension sharing order.
The pension arrangements that can be shared include: –
- Final Salary schemes including AVC’s
- Occupational Money Purchase schemes including AVCs and Section 32 Buyouts
- Personal pension arrangements
- Stakeholder pension arrangements
- Retirement annuities
- SSAS
- FURBS
- FSAVCs
- Income Withdrawal
- Annuities
- State Earnings Related Pension Scheme (SERPS)
- Second State Pension (S2P)
This includes arrangements where benefits are already in payment.
In England, Wales and Northern Ireland all accrued pension rights up to the time of divorce may be shared.
Benefits that cannot be shared include:-
- Basic State Pension
- State Graduated Pension
- Equivalent Pension Benefits where they represent the member’s only rights in the scheme
- Spouses and dependants pensions in payment from a previous marriage
- Death in service lump sum
- Benefits that are already subject to an earmarking order
- The three Great Offices of State i.e. the Prime Minister, the Lord Chancellor and the Speaker
A pension sharing order can be applied to pensions that are already in payment, whether by annuity or income drawdown.
If the pension is being paid by way of an annuity, the contract will be unwound and new separate annuities will be created. Alternatively, the ex-spouse receiving the pension credit i.e. transfer value, may choose to remain invested within a suitable pension arrangement and defer annuity purchase
The regulations provide no clear guidelines on the correct method for valuing a pension in payment. Different product providers/actuaries follow different methods. Therefore, this may to be area where the opinion of a consulting actuary may be felt beneficial.
Medical evidence may be required to prevent selection against the annuity provider.
Sharing an income drawdown plan will be achieved by dividing the drawdown fund between the parties.
Advice issues will include whether or not drawdown remains viable with the new lower drawdown fund for the scheme member.
The former spouse will need to take advice to establish the best method of enjoying income given their own circumstances, fund size, attitude to risk etc. It may be that they should use their share of the fund to purchase an annuity rather than continuing with draw down.
Where the former spouse dies before the Pension Sharing Order has been implemented, the person responsible for the pension arrangement shall, within 21 days of the date of receipt of the notification of death, notify in writing any person whom the person responsible for the pension arrangement considers should be notified of the matter, the following information
How the Trustees/Managers intends to discharge their liability in respect of the pension credit
Whether the Trustees/Managers intend to recover charges from the person nominated to receive the pension credit benefits, and if so, a copy of the schedule of charges.
A list of further information that the Trustees/Managers require in order to discharge their liability in respect of the pension credit.
The former spouse’s pension credit rights, will be subject to their own income tax liability on the emerging pension benefits.
A sharing Order can be made against different pension arrangements in respect of the same marriage, or even against a pension arrangement which already has a pension sharing Order related to a pensions marriage.
A Pension Sharing Order can be varied before a Decree Nisi has been made Absolute, but an application must be made before the Decree Nisi is made Absolute.
An application to vary would stop the implementation of the order until the application has been heard and decided.
It is possible to apply for a Pension Sharing Order when maintenance is varied for petitions filed on or after 1st December 2000.
Valuation of benefits
Active Member of Occupational Scheme
The valuation of benefits is based on the CETV the member has accrued under the scheme assuming pensionable service terminates on the date on which the request for the valuation was received.
Deferred member of an Occupational Pension Scheme
For a Money Purchase Scheme, it is the cash equivalent of the rights accrued on the termination of pensionable service, on the date on which the request for the valuation was received.
Annuities in payment
Where the member has an annuity in payment, the scheme may discharge its liability for the “pension credit” by providing an annuity for the ex-spouse and reducing the member’s annuity appropriately.
The ex-spouse does have the option though to transfer the pension credit to an alternative pension arrangement (i.e. Personal Pension/Occupational Scheme/S32 arrangement) is she wishes to defer taking the benefits or until she wishes to retire.
Annuity under occupational scheme
The annuity to be shared may be one where in the event of the member’s death; a pension is paid to a named widow(er). Following the pension sharing order, the member’s ex-spouse and the named annuitant to receive the pension on the death of a member may be the same person. In such cases the member’s re-profiled ongoing annuity payments can be based on the member’s life only. This is subject to the ongoing amount not exceeding the maximum allowable pension that can be paid to the member, taking into account the pension debit.
Alternatively, the annuity could be re-drawn on the basis of an annuity continuing to be paid on the death of the member to some other individual or individuals who qualify as a dependant of the member but who were not originally nominated for such a benefit. This would be subject to the rules for allowing for a reallocation of benefits. Basing the ongoing annuity payments on a single life basis would not be acceptable if the scheme to which the annuity relates pays a widow(er) pension to whoever is the member’s spouse at the time of the member’s death.
Care should be taken to determine the actual situation if advising the member.
Annuity Under Personal Pension/Retirement Annuity Contract
Generally the form of the original member’s annuity should continue on the same basis after the pension sharing order has been implements, But if the member had a joint life annuity prior to that time, the HMRC would not object to the annuity being recalculated on a single life basis. The form of the annuity for the ex-spouse would be expected, in any event, to be on a single life basis.
Again, the ex spouse could take an external transfer if so advised.
Moving Value Syndrome
The Pension Sharing annex must express the pension credit to be a percentage of the Cash Equivalent Transfer Value. This percentage will be applied to the CETV as at the Valuation Day, which in turn is decided by the trustees/managers within the 4-month implementation period. This has resulted in what is commonly referred to as the “Moving Value Syndrome”
It has been suggested that the following wording may resolve the problem.
“Whatever percentage (not being greater than 100%) shall need to transfer £x at the valuation day specified by the person responsible for [relevant arrangement] for the purposes of the Welfare Reform Pensions Act 1999, Section 29(7).”
Whilst the DWP have recently moved to block this wording, it may be possible to negotiate with the scheme administrators for the use of the wording but we would stress the need to obtain prior approval.
It is recommended that the draft annex is forwarded to the trustees/managers of the pension arrangement to obtain their approval of the wording before the order is sealed by the court.
CW Pension Consultants Ltd is not authorised to provide financial advice and the information contained within this website is for information purposes only.
We would be delighted to make a referral to a trusted financial adviser, if required.