Pensions and divorce: Q&A
We provide answers to typical questions from advisers on pension plans impacted by divorce proceedings.
Q: When an attachment (earmarking) order exists, pension income is paid after deduction of tax at the original member’s income tax rate. If there is too much tax deducted (eg emergency rate is applied) who is responsible for passing on the tax refund to the ex-spouse?
A: Any overpaid tax that cannot be corrected by the provider making adjusted payments during the remainder of the tax year can only be corrected between the original scheme member and the ex-spouse directly.
Q: Can a pension plan which is subject to an attachment order (previously known as an earmarking order) be transferred to drawdown?
A: Most attachment orders were written before Pensions Freedoms existed. It is not a simple matter to apply the precise wording of the Order to the pension payment options available today. The Order is a legal document and all parties to it must comply with its terms. Any party found to be involved in frustrating its terms could face legal action. In many cases it will be necessary to go back to Court to request the wording is amended before a transfer to drawdown may be facilitated.
Q: Can a pension plan which is subject to an attachment order (previously known as an earmarking order) be taken as uncrystallised funds pension lump sum (UFPLS)?
A: Most attachment orders were written before Pensions Freedoms existed. It is not a simple matter to apply the precise wording of the Order to the pension payment options available today. The Order is a legal document and all parties to it must comply with its terms. Any party found to be involved in frustrating its terms could face legal action. Each Order needs reviewed on a case by case basis and in some cases it may be necessary to go back to Court to request the wording is amended before an UFPLS may be facilitated.
Q: What is the difference between an attachment order and a pension sharing order?
A: An Attachment Order leaves the original scheme member in complete control. The ex-spouse will get income only once the scheme member decides to take benefits (unless there is a specific clause in the Order stating the age by which benefits must be taken). Once put in to payment, all income is taxed at the original scheme member's marginal tax rate and income will usually stop when the original member dies. Pension sharing leads to a clean break, a pension plan set up in the ex-spouse's own name (to receive the pension credit), giving them a fund from which they can choose when and how to take their benefits.
Q: Is it possible to change or replace an existing attachment/ earmarking order with a pension sharing order?
A: Pension sharing was introduced as an option where the petition for divorce was filed on or after 1 December 2000. If the attachment order relates to a divorce first petitioned before 1/12/00, then it is NOT possible to request a pension sharing order now.
For any attachment/ earmarking orders relating to divorce proceedings starting after 1/12/00 then the clients could go back to Court. It may be possible for the Court to revoke the terms of the existing Order and replace this with a Pension Sharing Order. It will be up to the parties Solicitors to negotiate terms to ensure the new agreement protects each client’s interests.
Q: Can a pension provider charge to implement a pension sharing order?
A: Yes they can, providing they have given details of the charges due prior to implementing the Order (i.e. the provider cannot simply deduct a charge from the pension fund without prior notification).
Pension Sharing impacts on pension holder
Q: What is a pension debit?
A: Where a member's benefits are reduced by an amount stated in a Pension Sharing Order, this reduction is known as a 'Pension Debit'.
Q: Is a pension debit tested against the original member’s lifetime allowance?
A: If paid from funds already in payment, then the original member's lifetime allowance will already have been used. The amount of LTA already used is NOT reduced. If paid from uncrystallised funds, then this is a transfer value and is not tested against the LTA (unless paid to a Qualifying Recognised Overseas Pension Scheme).
Q: If the original pension scheme member holds lifetime allowance protection, is this impacted by a pension debit?
A: It depends on the type of lifetime allowance protection held. Primary, Individual 2014 and Individual 2016 must be recalculated after a pension debit is paid, and may be lost. Enhanced and all Fixed Protections (2012, 2014 and 2016) are unaffected by a pension debit.
Q: The pension debit member holds valid enhanced protection. The pension credit receiving member will now face a lifetime allowance issue. Can they adopt the original member's enhanced protection?
A: No. Lifetime Allowance protection only applies to the client who applied and is not transferrable.
Q: Can dependant’s/ nominee’s or successor’s annuity/ drawdown plans have a Pension Sharing Order made against them?
A: No. The value of the pension income may be taken in to account when reaching a financial settlement but these types of pensions cannot be shared directly under any Pension Sharing Order. Any financial settlement would need to work on an ‘offsetting’ basis.
Pension Sharing impacts on recipient
Q: What is a pension credit?
A: When a pension debit (deducted from the original scheme member's benefits under the terms of a pension sharing order) is paid, this is received, on behalf of their ex-spouse, in the form of a 'Pension Credit'.
Q: My client has a disqualifying pension credit. What is this and can it be designated to drawdown?
A: A disqualifying pension credit is where a pension credit transfer is paid from previously crystallised funds, meaning that no pension commencement lump sum/ tax free cash can be paid when the receiving member puts their benefits in to payment. The receiving member must have reached minimum pension age, or qualify under any of the ill-health rules, before they can access the pension fund. They will have access to any retirement options allowed under the pension scheme, so if the scheme offers drawdown then this should be an option for the client. NB uncrystallised funds pension lump sum (UFPLS) cannot be offered as the client is not entitled to any tax-free portion.
Q: Can a provider refuse to accept a transfer of a disqualifying pension credit?
A: Yes. A provider who accepts a disqualifying pension credit must be able to administer this correctly, i.e. they must ensure they do not pay pension commencement lump sum/tax free cash from the funds. This involves additional checks so some providers have taken a commercial decision to refuse to accept this type of business.
Q: Is a pension credit tested against the receiving member’s lifetime allowance?
A: Yes, a pension credit is always received as uncrystallised funds and will be tested against the receiving member's lifetime allowance when put in to payment. There are circumstances where the receiving member may qualify for a pension credit factor (effectively increasing their lifetime allowance) and you can read about these here.
Q: If the member receiving a pension credit holds lifetime allowance protection, is there any impact?
A: It depends on the type of lifetime allowance protection held. Primary, Individual 2014 and Individual 2016 are unaffected. Enhanced and all Fixed Protections (2012, 2014 and 2016) will be lost if the Pension Credit is set up in a new arrangement - https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm093800 under the heading "Payment of a pension credit under a pension sharing order into a money purchase arrangement (personal pension scheme)”.
Q: If the member receiving a pension credit will now face a lifetime allowance issue, what are their options?
A: They need to check to see if they are eligible to apply for either of the available lifetime allowance protection options. Further details here, under Individual Protection 2016 and Fixed Protection 2016.
Q: Client has received a pension credit from their ex-spouse’s pension which was in payment. They are aged 50 and wish to put benefits immediately in to payment. Can they do this?
A: The pension credit receiving member must have reached normal minimum pension age, or satisfy the ill-health criteria, before they can put their benefits in to payment.
Q: Client is aged 77 and will receive a pension credit. Is there a lifetime allowance test? Can they take any pension commencement lump sum?
A: There is no lifetime allowance test if a pension credit is received after the member has reached age 75. However, they would have needed sufficient remaining lifetime allowance at age 75 to allow the pension provider to pay any pension commencement lump sum/ tax free cash when benefits are put in to payment (NB no PCLS or tax free portion is payable if the pension credit is paid from previously crystallised funds).
Q: My client is to receive a pension sharing transfer from their ex-spouse’s pension plan which is already in drawdown. Is this a drawdown to drawdown transfer?
A: No, this is not a drawdown to drawdown transfer. All pension sharing on divorce transfers are received as uncrystallised funds. However, if the transfer is paid from previously crystallised funds then no pension commencement lump sum/ tax free cash can be paid when the receiving member puts their benefits in to payment. This is known as a disqualifying pension credit. The receiving member must have reached minimum pension age, or qualify under the ill-health rule, before they can access the pension fund.
Planning during divorce proceedings
Q: My client is getting divorced and their pension assets are to be taken in to account with all other marital assets. Do they need to agree to split their pension funds or are there other options available to them?
A: The divorce settlement does not have to physically split the pension funds between the parties, for example, it may be possible to offset the value of the pension with other assets. You can read more in our Pensions and divorce article.
Q: Can pension sharing be arranged without involvement of a Solicitor/ going through the Courts?
A: No. It is not possible to have an unofficial 'pension share'. For such a transfer value to be an authorised payment, the Solicitors for the divorcing parties must raise a Court Order (other than in Scotland where a registered Minute of Agreement is sufficient).
Q: Can pension sharing be arranged after separation from a non-spouse/ non-civil partners?
A: No. A pension sharing order is only available for divorces, annulments and dissolution of civil partnerships. It is not available for cohabitees or other types of couple separations.
Q: A client has a SIPP which holds property. How is this shared under a pension sharing order; does the ex-spouse receive a share in the property or must the property be sold to release its monetary value?
A: This will depend on the rules of the SIPP scheme, e.g. whether or not it offers; in-specie transfer of benefits, sharing of property under multiple SIPP arrangements etc. It may not be necessary to sell the property, check with the SIPP provider.
Q: A public sector pension scheme (eg. NHS/Teachers) are saying they cannot transfer funds to a personal pension plan to satisfy a pension sharing on divorce. Is this correct?
A: Yes. Certain public sector pension schemes are unfunded and legislation does not allow them to pay a transfer out to an arrangement offering flexible retirement options. The scheme trustee should offer the ex-spouse membership of the scheme.
Q: Is a Pension Transfer Specialist (PTS) required to give advice where an ex-spouse is offered a transfer value under Pension Sharing on Divorce from a Defined Benefit pension scheme?
A: Yes if the ex-spouse has been offered membership of the Defined Benefit scheme.
Otherwise, as the transferee is not entitled to any safeguarded benefits we would interpret the FCA rules such that this transaction is not deemed a conversion or transfer. It would fall in to the category of a pension switch, meaning there is no requirement for a PTS to give advice. As always, the adviser firms own compliance department should be consulted and will have the final say on how they apply the FCA pension transfer rules.
Q: How are defined benefits split as part of a pension sharing order?
A: The defined benefits scheme rules will determine how a pension sharing transaction can be facilitated. Unfunded Public Sector schemes are unlikely to offer a transfer out and instead may offer the ex-spouse membership of the scheme. The scheme actuary will determine the value of the scheme member benefits. The Court Order will then determine the percentage (if in Scotland this can be a percentage or a value) of the pension fund that is to be passed on. Further details should be available from the scheme trustee/administrator.
Q: Who decides how the marital assets are valued and the pension funds are split between the divorcing parties?
A: This work would usually be done by the Solicitors acting for the divorcing parties. The Solicitors may engage with other professional services eg an actuary if required. The Court may make a final decision over any dispute.
Q: Is a member's annuity already in payment able to be shared under a pension sharing order?
A: If the annuity has been purchased from registered pension scheme funds (i.e. it is not a Purchased Life Annuity) then it is possible to share this pension income under pensions and divorce legislation. However if the annuity in payment is a dependant's, nominee's or successor's annuity then this cannot be shared under a Pension Sharing Order. See the earlier section 'Pension sharing impacts on pension holder' for more information.
Q: Can a pension scheme member take their pension benefits, or choose to transfer their pension fund before divorce proceedings are finalised?
A: This may depend on how far along the divorce proceedings are. Where an insurer has been asked to provide pension fund values in respect of a divorce, they are likely to ask for confirmation that the pension is unaffected by the final divorce settlement (e.g. offsetting may be used), or if they have seen a draft Consent Order, they are likely to wait until the final sealed Order is available so that the Order can be satisfied before any member benefits are paid out from the plan.
Q: Do either an attachment/ earmarking order or a Pension Sharing Order transfer with the pension?
A: An attachment/ earmarking order will transfer from the original pension scheme to the receiving pension scheme.
A Pension Sharing Order should be satisfied by the pension scheme whose details are included in the Order. If a transfer payment takes place before the pension scheme are made aware of the PSO (and so they cannot implement this), then it is likely the client will need to go back to Court to request an amended PSO against the current (receiving) pension scheme.
Q: Can an overseas Court Order be applied against a UK pension plan?
A: No. Only a Court Order from the UK jurisdictions (England & Wales, Northern Ireland or Scotland) can be applied to registered pension scheme benefits.
Q: Can an overseas pension fund be shared on divorce and transferred to a UK pension scheme if the ex-spouse is resident in UK?
A: This will depend on the overseas pension scheme rules. If their rules allowed a transfer to a UK registered pension scheme, then there is no legislation preventing a UK registered pension scheme from accepting it. Obviously individual providers may have their own restrictions or requirements.
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