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Introduced
under section 166 of the Pensions
Act 1995, as inserted sections 25B to 25D of
the Matrimonial Causes Act 1973 (MCA 73), an earmarking
order gives the courts the power to earmark the
members pension rights.
This order will benefit the former spouse and has
applied since 1 July 1996 in cases where partners
in divorce
were unable to reach an out-of-court settlement. |
Earmarking will apply, as with
pension sharing, to divorce and nullity but also
to judicial separation. Once the courts have granted
the earmarking order, it will not take effect until
the retirement age of the scheme member.
This means that a valuation of the members pension
rights using the scheme administrators cash
equivalent transfer value (CETV) is of little
value for earmarking orders as the court concluded
in the case of T v T (1998). It will be necessary
to use projections to retirement age, produced by
the scheme trustees for the pension arrangement
which could be an employers pension scheme or a
private
pension scheme.
Amendments to earmarking were made
in the Welfare Reform and Pensions Act 1999 (WRPA
99) requiring earmarking orders from 1 December
2000 to be expressed in percentage terms and this
can be applied to a pension income or tax free
lump sum, directing the scheme member to make
such a commutation as required.
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Procedures
The Pensions Act 1995 introduced earmarking and requires that
the court has regard to the members pension rights in determining
financial settlement on divorce. If the parties on divorce cannot
settle out-of-court, the court can grant an earmarking order.
The court will instruct the scheme member to obtain from
the scheme administrators the CETV
method used for the valuation and in England and Wales
this will also include retirement benefits accrued prior to
the marriage.
The pension provider will then have six weeks to provide the
CETV as the step-by-step
guide shows, however the court may require projections
to retirement age from the provider or expert evidence to
determine the valuation of retirement benefits, usually from
an independent
financial adviser (IFA) that has the appropriate qualifications
to be a pensions expert.
When the court grants an earmarking order against the members
pension arrangement it must be sent to this individual within
7 days of the granting of the order or 7 days after the decree
absolute together with a copy of the decree nisi, decree
of nullity or decree of judicial separation. The pension provider
must record this order to be applied at the members retirement
date.
If the scheme member subsequently transfers retirement benefits
to another provider the earmarking order will be attached
to the new provider, however, the new provider can refuse
the pension
transfer due to the extra administrative element of the
earmarking attachment.
Retirement benefits
The earmarking order granted by the court could be directed
at a specific part of the scheme members pension rights to
be paid to the former spouse at retirement age and these couldbe
the pension income, tax
free lump sum or lump sum death benefit.
For example, an earmarking order paying a former spouse 30%
of the members pension
income would come into effect when the husband chooses
to retire, although she would not receive the benefits if
he dies or if she remarries. The court may decide that a percentage,
say 60%, of the tax free lump sum would be more appropriate.
Therefore the former spouse could receive 60% of the members
tax free lump sum when the husband chooses to retire.
The court can override the scheme trustees discretion and
include the former spouse as a beneficiary of the lump sum
death benefit. Applying an earmarking
order to the lump sum death benefit could be advantageous
where the former spouse is receiving maintenance payments
from the husband. In this case the court could earmark 100%
of the lump sum death benefit so if the husband dies, the
former spouse will receive these benefits as compensation
for the lost maintenance income. Ultimately it is important
to remember that a variation
of settlement order can apply to earmarking at any time
after the order is granted.
Earmarking and pension sharing orders
An earmarking order cannot be made where there is a pension
sharing order applied to the pension arrangement, as stated
in section 25B and 25C of the MCA 73. This restriction only
applies to the pension sharing order relating to the existing
marriage so it would be possible to apply an earmarking order
to a previous marriage that was subject to a pension sharing
order. As a result of this legislation it will not be possible
for a former spouse to apply for an earmarking order against
the lump sum
death benefit where the pension arrangement is also subject
to a pension sharing order. This means it is not possible
to secure the continued payment of maintenance to a spouse
in the event of death of the former partner.
A pension sharing order cannot be made where there is an existing
earmarking order applied to a pension arrangement, as stated
in section 24B of the Matrimonial
Causes Act 1973. The Act does not specify to apply only
to existing marriages and therefore it can apply to any marriage
with an earmarking order. In his article "A Practitioner's
Guide to Pension Sharing Part 1" [2000] Fam Law 489,
David Salter shows that the scheme member can avoid a pension
sharing order to the detriment of the current partner by transferring
the retirement
benefits to a pension arrangement already subject to an
earmarking order.
Limitations
Since before the introduction of earmarking it has been apparent
that there were significant limitations to the use of earmarking
of a members
pension rights for a pension arrangement. As such orders
have not been granted in many divorce proceedings to date
with family law practitioners preferring the offsetting of
other assets against retirement benefits.
This is due to a number of practical problems. Firstly earmarking
does not allow for a clean
break between the partners financially in cases of divorce
or nullity of marriage. Within Inland Revenue limits the pension
scheme member can deliberately avoid taking benefits until
age 75 and therefore deprive the former spouse of an earlier
pension income. Also if the scheme member died no benefits
will be paid to the former spouse.
For a money
purchase scheme the former spouse has no control over
where the members money is invested and for a final salary
scheme the member could opt out and start new post
divorce contributions, therefore depriving the former
spouse of a larger pension income at retirement age. Also,
the earmarking order will be terminated on the remarriage
of the former spouse and on payment the pension will be taxed
at the scheme members highest marginal tax rate, ignoring
the former spouses unused allowances or lower marginal tax
rate if applicable.
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