When relationships end
Pension earmarking is one of the options available on divorce or the dissolution of a civil partnership.
On your divorce, or dissolution of your civil partnership, all of your assets and those of your ex-spouse or partner are taken into account. If you decide to opt for pension earmarking then when you start to draw retirement benefits, part of them are paid to your ex-spouse or partner or vice versa. The Court instructs your scheme administrator or pension provider to make these payments to your ex-spouse or partner or vice versa, the payments are made to you.
In England, Wales or Northern Ireland, these payments can be made from your pension income and/ or the pension commencement lump sum (PCLS). In Scotland, they can only be made from the PCLS.
If you're also entitled to a lump sum payable on your death, the Court can also instruct that some, or all, of this is payable to your ex-spouse or partner or vice versa to you. Although the proportion of your pension payable to your ex-spouse or partner is set at the time of your divorce, or dissolution of your civil partnership, each party can apply to the Court for the amount to be varied.
While it's simple to understand, pension earmarking can have some problems:
- If you die before you reach retirement, your ex-spouse or partner (or you)may receive nothing;
- Your ex-spouse or partner (or you) does not receive anything until you start to draw your retirement benefits;
- If you retire early, or stop contributing to pensions, your ex-spouse or partner (or you) may receive less than they expected;
- If you die after you have started drawing your retirement benefits, any income payable to your ex-spouse or partner (or you) also stops; and
- The Courts prefer a ‘clean break’ approach to divorces and the dissolution of civil partnerships. Pension earmarking does not fit with this approach.
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.