Pensions are often one of the most valuable assets in the matrimonial pot, and it is essential that expert advice is obtained to ensure that any pension provision is dealt with fairly.
In the vast majority of cases, the most effective way to deal with pensions on divorce is by way of a pension sharing order, whereby the agreed share of one parties’ pension will be carved out and transferred to the other spouse. They are then in complete control as to what they do with these funds and when and how they decide to draw them in retirement (subject to the rules of that particular pension scheme).
Pension sharing was however only introduced on 1 December 2000 and before that a pension attachment order (also known as a pension earmarking order) was the only real alternative.
Whilst pension attachment orders are considerably less common nowadays following the advent of pension sharing, there are still situations where a pension attachment order may be preferred. For example, a pension sharing order is only available on divorce and cannot be used for parties opting for a judicial separation.
What is a pension attachment order?
A pension attachment order is a form of lump sum and periodical payment (maintenance) requiring the pension provider to pay a proportion of a pension to the other party. It effectively means that either part of all of a parties’ pension benefits are redirected to their former spouse or civil partner at the time the pension comes into payment on retirement. It does not provide a clean break between the parties as there is an ongoing link with the ex-spouse or civil partner.
How do pension attachment orders work?
Under a pension attachment order, the family court will make an order stating that part, or all, of the parties’ pension benefits must be paid to their ex-spouse or civil partner when they become payable. The pension still belongs to the pension scheme member however, and it is important to note that the income will be taxed as though it is being paid to the member in full.
The court can order that the ex-partner receives one, or a combination, of the following benefits:
- all or part of the member’s tax-free cash sum;
- all or part of the member’s pension monthly income; and/or
- all or part of any lump sum paid upon death of the member.
What are the advantages of a pension attachment order?
- It allows for both the tax-free cash benefit and the pension income benefit to earmarked.
- If the member transfers their pension to a new scheme, the attachment order will follow the member’s rights to the new arrangement.
- Any death-in-service benefits can also be set aside.
What are the disadvantages of a pension attachment order?
- There is no clean break between the parties following divorce or dissolution and the attachment order would be capable of variation.
- Lack of certainty regarding the future payment of the pension benefits - any attachment order (other than lump sum death benefits) would usually fall away on either the death of the pension holder or the remarriage of the receiving spouse.
- The attachment payments will not start providing funds to the ex-partner until the pension holder decides to retire. Therefore, there may be financial implications if the receiving spouse is older than the pension holder or if the pension holder chooses to delay their retirement / drawing their pension.
- Likewise, the pension holder could choose to retire early and / or take their pension in full under the pension freedoms regime, greatly reducing the funds the receiving spouse had anticipated they would be entitled to.
- Some poorly worded pension attachment orders can lead to confusion and misinterpretation when implemented by the pension provider, particularly those drafted before the pension freedoms legislation.
- A pension sharing order is generally a much more precise and secure way of dividing pension assets.
Given the extensive issues and uncertainties around pension attachment orders, it is of no surprise that the remedy of a pension sharing order was introduced and favoured by most. If you are already subject to a pension attachment order however, or have general queries regarding pensions on divorce, you should not hesitate to contact Richard Rigg or a member of our family team.
