The rules relating to pensions have recently changed, allowing people greater ‘ Pension Freedom’ to withdraw funds rather than buying an annuity, on retirement.
However, this could cause problems for divorced spouses who obtained a Pension Earmarking Order in their divorce. Earmarking orders provide for a percentage of any lump sum , and /or a percentage of the income from the pension, to be paid to the pension-holders spouse at the time the pension holder retires. Because the pension is still in the name of the original holder, the spouse receiving the payment had no control over when, or how, the benefits are taken.
Family Partner Marjorie Taylor explains, “This kind of order was introduced in 1996, and was common before 2000, when the law changed to allow pensions to be shared at the time of the divorce, creating separate funds for each spouse. At the time that Earmarking Orders were made, most pensions provided for a cash lump sum to be taken on retirement, and for the rest of the fund to be used to buy an annuity. But the new rules mean people can now withdraw the whole fund (although they will normally pay significant tax on the money)”
She continues, “This could mean that an ex-spouse could seek to deprive their former partner of retirement income by withdrawing the whole fund as capital, so that nothing is left to buy an annuity or create an income stream.” While there would be tax consequences, a bitter ex-spouse wanting to deprive their ex of retirement income, or someone who has not realised the tax implications or who feels the benefit of the cash sum outweighs the tax ‘hit’, may chose to draw down their pension in this way, significantly affecting their ex.
Earmarking became uncommon from 2000 onwards when Pension Sharing Orders were introduced and became the more common way to deal with pensions. Obviously, the current changes in the rules were not something which lawyers, or courts making such orders 20 years ago, could have foreseen. Depending on how the order is worded, you could be vulnerable.
If you divorced (or obtained a financial order) between July 1996 and December 2000, which included provision for payment from your ex’s pension, it would be sensible to take advice to check whether your Order may be affected by the changes, and to discuss options.
If you are worried, make an appointment to see Marjorie Taylor or Marion Fisher, bringing a copy of your Order with you, and we can advise you as to whether you could face problems.