Posted October 23rd, 2009
I am often asked why earmarking is not used more often. Since 1996 such settlements have been available but not widely used.
My own view is that in certain circumstances an earmarking order can have its merits and if drafted correctly, with the right protections placed around it, can ultimately meet a client’s needs.
However, there are a number of key limitations which need to be fully understood. It will pay to review your options in full and ensure that if earmarking is deemed to be appropriate, you have discounted the other options of pension sharing and pension offsetting, and vice versa.
I have set out below some of the main advantages and disadvantages of this option.
Advantages
• It allows for both the tax free cash benefit as well as the pension income benefit to be earmarked.
• Death in service benefits can also be earmarked.
• It is possible to use an earmarking order in circumstances of judicial separation and nullity not just on divorce.
Disadvantages
• It cuts across the clean break principle as the pension holder can decide when to draw the pension and lump sum benefits, perhaps delaying this beyond their normal retirement.
• The benefits payable to the ex-spouse cease when the pension holder dies.
• Often, the ex spouse has no control over how the funds are invested (and therefore this could be in higher risk assets).
• The member could (out of spite) opt out of the original scheme and start a new post divorce arrangement potentially reducing the earmarked benefit.
• The automatic termination of the court order on remarriage of the ex spouse is a clear incentive to continue to cohabit.
• The entire pension is taxed in the hands of the pension holder and earmarked payments are made after tax has been paid. Often this will not be tax-efficient for the ex-spouse.
Have you fully reviewed your options on divorce? How in control do you feel on your decision-making? Should you consider earmarking and how much should be earmarked?
If you wish to discuss any of the issues here, please call me in confidence on 01204 663904.
Tags: clean break, Cohabit, Court Order, Death in Service, Divorce, Earmarked, earmarking, Ex Spouse, Judicial separation, Normal Retirement, Nullity, Pension, Pension Attachment, Pension income, Pension offsetting, Pension Sharing, Tax Free Cash | Posted in Pension Attachment |
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Posted August 20th, 2009
Since 2000, a pension sharing order has been available as an option on divorce. With the ability to achieve a clean break this should be the option of choice for most divorce cases where the pension benefits are significant (and earmarking / offsetting have been discounted).
A lot of focus is rightly given to ensuring that an equitable pension share is achieved and here the use of a suitable actuary is advisable. However, in my opinion, less time is given to the options available once the pension share has been calculated and many clients approach this stage with unnecessary fear and trepidation.
Options
With a pension share there are two options – an internal or external transfer – and either option can have its merits depending upon circumstances.
With an internal transfer the pension does not physically move from the existing scheme but a debit and credit is created to satisfy the pension share. Most importantly, the internal scheme benefits can differ significantly. For example, some final salary schemes offer shadow membership whereby the same defined benefit rights generously apply to the new member whilst others provide poorer value money purchase equivalents.
With an external transfer the fund value of the pension share is physically transferred to a new arrangement in the individual’s name, with the associated issues of understanding the investment and annuity risks involved but having the benefit of control.
Considerations
Here are a few suggested considerations which will assist in deciding which type of transfer is appropriate.
* How flexible is retirement and who decides when retirement can start.
* How much pension income will be payable at retirement and how secure is it.
* How much risk is involved / could my pension fall in value.
* What are the death benefit arrangements and who will ultimately benefit.
* Can future pension contributions be paid.
* What are the charges involved.
If you would like more information on how we deal with pension sharing, please call us on 01204 663904 or contact us by email on advice@thedivorceifa.co.uk
Tags: Actuary, clean break, death benefit, Divorce, earmarking, external transfer, Final Salary, internal transfer, offsetting, Pension, pension share, pension sharing order | Posted in Pension Sharing |
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