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 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
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
Grab the resources you need!
If you’re studying for your CII R04 exam, and you’re a little nervous about it, grab our free taster to try out one of Brand Financial Training’s resources for yourself. Click the link to download the R04 mock paper taster now!
Alternatively, you can download a taster for AF7, if you are preparing for that exam.