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This blog gives you an easy to follow guide on everything you need to know about pension attachment orders (aka "Pension Earmarking"), including:
- What is a pension attachment order?
- How does pension earmarking work?
- What are the pros and cons of pension attachment orders?
Let’s take a look at a few things you need to consider before applying for a pension attachment order...
What Is A Pension Attachment Order?
A Pension Attachment Order (also known as a "Pension Earmarking Order") requires a divorced pension-holder to pay their ex-partner some money from their pension on retirement. This can either be in the form of regular payments, or via a lump sum.
Unlike some other forms of pension division, pension earmarking does not grant you a ‘clean break’ when you divorce, as you will still have a financial connection to your ex-partner via the pension.
How Does A Pension Attachment Order Work?
When making a pension attachment order the court will determine how much of the pension should be given to the ex-spouse. This could be a set portion of the pension sum, or could even be up to the entire value of the pension, depending on the circumstances (to learn more about how the court decides to split your finances when you divorce, check out my <bloglink>divorce settlement guide<bloglink>).
The pension still belongs to the scheme member, but when the member's benefits become payable, they have to give a specific amount to their ex-partner.
The court can order one or more of the following awards to the ex-partner:
- All or a portion of the participant's pension income;
- All or a portion of the participant's tax-free cash amount;
- All or a portion of any lump sum payable upon the scheme member's death.
For a better understanding, here's a quick example: Lucy and Jim <bloglink>get divorced<bloglink>, and the court decides that Lucy is entitled to a share of Jim's pension. The court order that Lucy should receive 50% of Jim's lump sum payment when he retires, and then 40% of his monthly payments thereafter.
Pros and Cons Of A Pension Attachment Order
Before you apply for a pension earmarking order, you should understand the pros and cons. Here’s a breakdown:
You might have noticed that the benefits of pension attachment orders are somewhat outweighed by the disadvantages. For this reason it is rare for the court to make a pension attachment order these days, and they tend to favour the two main alternatives...
What Options Do You Have Other Than Pension Earmarking?
Other than earmarking your pension, there are two ways to deal with pensions during a divorce settlement: Pension Sharing and Pension Offsetting:
Pension Sharing Orders
A <bloglink>Pension Sharing Order<bloglink> divides up the parties' pension at the time of the divorce and leaves the parties with their own separate pension funds.
The spouse receiving the award will be given a lump amount from their ex-spouse's pension (called the 'pension credit'). They then use this sum to go and open their own pension, with a new provider.
This way, the parties are both left with their own pension plan, in their own name, and which is tailored to their own demands and expected lifespan.
This is the major difference between a pension sharing order and a pension attachment order.
A pension attachment order is really a kind of <bloglink>spousal maintenance<bloglink>, paid from the other partner's pension fund. As such, it does not allow for a clean break settlement, and therefore is increasingly disliked by the courts.
Unlike a pension sharing order or pension attachment order, pension offsetting does not split an existing pension between spouses. Instead, pension offsetting is a way to identify pension and non-pension assets when the divorcing parties are settling their finances, and then using a valuable non-pension asset (such as the house) to offset the value of the pension. This means that one person keeps the full pension and the other gets something else of equal value, such as a greater share of the equity in the <bloglink>family home<bloglink>.
What Is The Pension Attachment Order Process?
What Happens If Your Situation Changes?
Remember, it could be a long time between the <bloglink>pension attachment order<bloglink> being made (at the time you divorce), and it coming into effect when the scheme member retires.
But what happens if your situation changes in the intervening years?
- If your former spouse remarries, then any earmarking order made against their pension payments will lapse, with the full pension being restored to the member.
- If your former spouse dies before retiring, then the earmarking order will also lapse.
- If a scheme member transfers their benefits to another scheme, the earmarking order will also be transferred.
For these reasons it's important you keep the pension provider up to date regarding any changes in your circumstances. It's also a reason the courts prefer pension sharing orders, as they are unaffected by changes to either spouse's circumstances after they have been made.
What Is The Difference Between A Pension Sharing Order and A Pension Attachment Order?
While a pension sharing order divides up the parties' pension provision at the time of the divorce and leaves both parties with their own separate pension funds; a pension attachment order makes regular payments from one party's pension to the other spouse upon retirement.
Can I Opt For Pension Sharing Without A Court Order?
No - you need to apply for court for a pension attachment order.
Is It Compulsory To Earmark Your Pension?
Pension earmarking is not compulsory. It is just one of the three options available to you, the others being <bloglink>Pension Sharing Orders<bloglink> and Pension Offsetting Orders.