11. Pensions and Divorce
In this chapter we discuss the different ways in which a person’s pension assets are split up in the event of divorce.
Shortened demo course. See details at foot of page....s popular.
Offsetting was introduced in England and Wales by the Matrimonial Causes Act 1973 which enabled divorce courts to account for private pension arrangements when reaching a struc...
Shortened demo course. See details at foot of page.... the other spouse has no pension related provision for retirement. As mentioned earlier, offset is still common in the divorce process, one reason being it gives a clean break.
Earmarking was introduced by the Pensions Act 1995. This method allowed courts to separately identify (earmark) pension benefits in a divorce settlement. The system has been in place for divorces petitioned from 1 July 1996 (19 August 1996 in Scotland).
The earmarking process is as follows:
The court orders the pension owning spouse to obtain a cash equivalent transfer value (CETV) for pension benefits accrued to date. Outside Scotland, the value includes benefits accrued prior to marriage.
The pension scheme or pension provider must provide the CETV at a valuation date within three months ...
Shortened demo course. See details at foot of page....ion owning ex-spouse could potentially hold all investments in low risk, low yielding investments
A final salary scheme member could decide to reduce benefits by opting out of the scheme and then starting a new post-divorce pension arrangement
There is a clear incentive to cohabitation in the automatic termination of the court order on remarriage
The whole pension is treated for tax purposes as the pension owning ex-spouse and earmarked payments are provided from the net pension received
There is no clean break with the ex spouse – something many people desire in this situation.
Sharing (previously known as splitting) was introduced in the Welfare Reform and Pensions Act 1999 and came into force for all proceedings started on or after 1 December 2000.
This followed the Government’s realisation of the unpopularity and perceived unfairness of the earmarking “solution”. The preferred solution among many lawyers and pension professionals has become pension sharing.
The courts can issue ‘pension sharing’ orders for the following types of plans:
Shortened demo course. See details at foot of page....nsion owning ex-spouse subsequently dies, it will have no effect on the sharing order. If the non pension owning ex-spouse dies, then there may be a death benefit payable if they previously accepted membership of the original pension scheme. If they transferred, death benefits will depend on the terms of the new arrangement.
If either party subsequently re-marries, there will be no effect on the sharing order as benefits have already been taken away.
Pension sharing like offsetting, provides a clean break.
Earmarking of pension benefits and offset were both unaffected by the introduction of simplification. This means than any earmarking is ignored in valuing a member’s pension for lifetime allowance purposes.
For pension shari...
Shortened demo course. See details at foot of page....edit will already have been taken into account.
For the member with a pension debit at A-Day, the value of the debit is ignored. Thus only unshared benefits will be valued for the purpose of testing against any lifetime allowance.
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