The 2015 pension flexibilities are having unintended consequences in terms of their potential effect on divorce "earmarking" or "attachment" orders. These orders were popular in the 1990s as a way of allocating a part of a member's lump sum or pension to a former spouse, to be paid at the time the member's benefits became payable. They were largely replaced by pension sharing orders which have effect immediately on divorce and pass a part of the pension benefit irrevocably to the former spouse, thereby achieving the desired "clean break".
However, there are a considerable number of earmarking orders still in force and they could be significantly affected by exercise of the new flexibilities. As all the pension rights remain with the original member after the order, early access to the pension pot will mean a smaller amount becoming available to the former spouse when the benefits become payable. Although it is possible for the former spouse to go back to the Court to ask for the order to be varied, this will clearly be difficult if payments have already been made.
Late last year, the Government consulted on regulations which would have required a scheme to notify a member's former spouse where there was an earmarking order in relation to a member's pension and the member decided to take advantage of a flexible access option. The trustees or managers would have had to write to the former spouse when the member's application for flexible access was received, giving details of the form in which the member would be taking their benefits.
The pension industry was concerned that taking action only when the member decides to take flexible access might, in practical terms, be too late in the day. Trustees could be leaving themselves too much to do in contacting the former spouse in the limited time available.
In response to industry concerns, the DWP has decided to delay the notification requirement to a later date.
Comment & Actions
- Despite there currently being no notification requirement in force, it would be sensible for trustees to take a look now to see if there are any earmarking orders in place and to consider writing to former spouses to let them know about the potential implications for their earmarked benefits. We would be happy to help clients with a suitable notification.
- The proposed new rules would have applied only apply to members with flexible benefits. But members of defined benefit schemes may, depending on the scheme rules, be able to convert their benefits to flexible benefits, in which case the problem could potentially arise here too.