Member Article

Beware the pensions minefield in divorce

Pensions have always been a critical and complex aspect of divorce finances and are part of the financial disclosure that both parties must make.

With courts quite rightly clamping down on dishonest spouses who disobey orders to provide financial disclosure, it is critical that anyone going through a divorce provides correct information about their pensions.

Yet an unintended consequence of the government’s new pension freedoms introduced in April this year has further complicated matters - and could actually encourage dishonesty, and leave a divorcee without their nest egg if their former spouse empties their pension pot.

The Government now recognises this potential problem and is looking to close the loophole in their pension legislation that could see one party left penniless in retirement. It is currently consulting on a proposal which would require pension schemes to notify former spouses if their ex-spouse wishes to transfer or cash in their pension which is already subject to what is known as an ‘Attachment Order’. In other words, the ex-spouse would be tipped off beforehand.

In the mid-1990s, the Government introduced legislation to introduce ‘Earmarking’ (now called ‘Attachment’ Orders enabling the Court to order that part of one spouse’s pension income is to be paid to the other. Similar principles applied to the lump sum payable upon retirement.

These Orders were never popular for various reasons:

1. They are capable of being varied which means that there is always a risk of one party receiving more (or less!) than they originally envisaged
2. The pension benefits will be lost if the recipient remarries
3. If the pension member dies, then the income derived from the deceased’s pension will no longer be available to the other party
4. The ex-spouse has no automatic right to determine the date upon which the member spouse chooses to retire
5. The member spouse can at any time arrange to divert future pension contributions into a different scheme so as to reduce the benefits which the ex-spouse will receive
6. There can never be a financial ‘clean break’ between the couple.

Because of the above reasons ‘Pension Sharing Orders’ were introduced in December 2000. These allow a couple to achieve a clean break on divorce. The Order takes effect very shortly after the divorce, enabling the recipient to take his or her benefits without having to rely upon the other spouse.

Anyone who currently has the benefit of an Earmarking Order needs to be aware of the loophole in the new pension freedoms, which could potentially have a disastrous impact on their expectations in terms of pension income.

The pension reforms provide flexibility for people over 55, enabling them to drawdown as much, or as little, of a pension by way of a lump sum - rather than having to buy an annuity in retirement. This freedom is dependent on meeting certain criteria.

This flexibility provides the ideal opportunity for those whose pensions are subject to an Attachment Order to take capital out of their pensions for their own use and benefit - rather than enabling the fund to provide an income for their ex-spouses as originally intended.

In theory, it is possible that were a spouse to take 100% of his or her pension as cash, there would be nothing left to pay the regular pension payments to the ex-spouse.

Unless - or until - there is a change in the rules, divorcees who have the benefit of Earmarking Orders need to beware that they could be deprived of pension income, and should take legal advice as soon as possible in order to protect their position.

This was posted in Bdaily's Members' News section by Wayne Lynn .