UK: Developments on Divorce

Last Updated: 30 November 1998
During the summer, the Government published in draft form the legislation that would implement the measures to put pensions sharing on divorce on the statute books. By publishing the detailed legislation in draft, the Government is hoping that a rigorous consultation process will be able to iron out most of the difficulties so that the legislation will fully implement the Government's policy and ensure that it works in practice. This may be a wise course. The difficulties of marrying together family, pensions and tax law should not be underestimated. Indeed there is mounting evidence to suggest that the existing measures to earmark pensions benefits, introduced back in 1996, are causing considerable difficulties in practice for family lawyers, pension scheme trustees and administrators, as well as the divorcing couple themselves.

Pension sharing will allow all, or a proportion of, the pension rights accrued by a member of an occupational pension scheme, personal pension scheme or SERPS to be transferred to the ex-spouse. These pension rights will become the property of the ex-spouse and will no longer depend on the circumstances of the member in whose name they were initially built up. Depending on the nature of the pension scheme, these rights may be transferred out of the pension scheme or retained within it separately in the name of the ex-spouse.

The draft legislation would amend existing family law to introduce a new type of order or negotiated agreement for pension sharing. This would enable couples to agree to, and the courts to order, the division of pension rights within the overall financial settlement on divorce. The draft legislation would also amend pensions law to allow pension schemes to reduce the member's rights in line with the order or agreement and to create new rights for the ex-spouse. The draft legislation also makes the necessary changes to tax law.

Reaction to pensions sharing

The broad thrust of the proposals on pensions sharing has been generally welcomed but the NAPF has warned that some members will end up with inadequate pensions and will become dependent on the State, particularly where the member remarries. Under the proposals in the draft legislation, the pension which has been allocated to the former spouse is still to be treated as belonging to the member for the purposes of calculating Inland Revenue limits. On retirement, the amount allocated to the ex-spouse is recalculated in line with statutory increases and then deducted from the member's entitlement, leaving the member with a much reduced pension. Many members may be unable, under the normal Inland Revenue contributions and benefits limits, to rebuild an adequate income for retirement during their working lives. This would particularly affect those who divorce late in their career.

Problems with earmarking

The present problems associated with implementing court orders earmarking member's pensions stem from the understandable unfamiliarity of many family lawyers with pensions. Under the earmarking legislation, the key point is that payment under an earmarking order can only be applied for the benefit of the ex-spouse at a time that the member's benefits themselves have been brought into payment. Earmarking orders are essentially limited to requiring:

  • pension scheme trustees to pay all or part of a member's pension once in payment to an ex-spouse (but not in Scotland
  • the member to take part of the pension as a cash lump sum at retirement and the trustees to pay all or part of the member's cash lump sum at retirement to an ex-spouse
  • the member to nominate the ex-spouse to receive all or part of any lump sum death benefit and the trustees to pay all or part of any lump sum death benefit to the ex-spouse.

In practice there are reports that earmarking orders have been issued which attempt to earmark a pension to become payable on the member's death. This is not permitted by the legislation. Another error is for the order to be addressed to the member rather than to the trustees. To be enforceable, the order must be addressed to, and served on, the trustees.

In some cases it has been reported that the order specifies that trustees should simply pay a fixed percentage of the member's pension, once it comes into payment, to the ex-spouse. Such an order is within the scope of the legislation but may be unlikely to reflect the court's intention since the percentage would also apply to benefits accrued by the member in the scheme after the divorce.

One undoubted weakness in the current legislation is that the trustees have no right to see the draft earmarking order in advance so that they can correct any such errors. Instead they are limited to the right to make representations within 14 days from the date the order is served.

For further information please contact Jane Marshall, e-mail: Click Contact Link , 7 Devonshire Square, Cutlers Gardens, London EC2M 4YH, UK, Tel: + 44 171 655 1000

This article was first published in the Winter 98/99 Hammond Suddards Pensions Newsletter

The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.

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