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Taking a Look at Pensions and Divorce

Taking a Look at Pensions and Divorce

Looking at the case studies for this month’s R06 exam, it looked highly likely that a question on pensions and divorce was going to be asked. It also raised a few queries as to the options available to an ex-spouse.  Here we look at the options of pension sharing and earmarking.

Earmarking

Earmarking basically means that the ex-spouse has benefits earmarked for them within the member’s pension scheme.  These could be paid when the member retires or on their death.  The consequences of an earmarking order are:

  • Earmarked benefits start when the member starts to take their own benefits; this means the member can defer taking benefits
  • Income is taxed at the member’s marginal rate of income tax – which might be more or less than the ex-spouse
  • Upon death of the member, the earmarked payment order ends
  • If the ex-spouse marries, any earmarked payment order no longer has legal standing
  • There is no clean break for either member or ex-spouse

Impact on LTA

  • There is no direct impact on the LTA for either spouse
  • The ex-spouse receives a pension income that is not valued against their LTA
  • They can therefore fund a pension of their own to the value of the LTA plus receive the benefits under earmarking without paying a LTA charge
  • However, the member will have a lower pension income, but as they still own all the pension rights, including those being paid to the ex, these are valued against their LTA
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Pension Sharing

Pension sharing does offer a clean break, as the member’s pension rights are divided at the time of the divorce.  The consequences of a pension sharing order are:

  • Benefits aren’t forfeited in the event of either death
  • There is no risk to the ex-spouse if they marry again
  • Pension income is taxed at their own marginal rates
  • The ex-spouse doesn’t have to wait until the member takes benefits

Impact on LTA

  • The transfer of benefit counts towards the ex-spouse’s LTA
  • They may be able to claim an enhancement factor if benefits had already been tested against the member’s LTA
  • Pension debits do not generally count towards the member’s LTA although will impact any primary protection

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