Associate solicitor Rebecca Ledgerwood, in our Family Law team, looks at what a reported increase in pension attachment orders means.
Recent press reports have stated that there has been an increase in the number of divorcing couples opting for pension attachment orders as part of their financial settlement, instead of the more usual ‘pension sharing orders.’ We explain more of the detail below. The trend was discovered through a Freedom of Information request submitted to the Ministry of Justice.
A pension attachment order allows for part of an ex-spouse’s pension income to be paid to the divorced spouse, but unfortunately this arrangement ceases when the pension holder dies. For that reason, more divorcing couples opt for pension sharing orders (PSO’s) which are not impacted by death in the same way.
It is unclear what has prompted an increase in pension attachment orders as typically they are more risk laden and less favourable than a pension sharing order. It has been surmised that the rise in couples opting to commence divorce proceedings without taking legal advice may be one factor influencing this increase. In the current economic climate, many divorcing couples try to use ‘DIY’ solutions for their financial arrangements.
When considering assets on divorce or dissolution it is important that pension assets are also included. Often couples who do not seek specialist family law advice overlook pension assets on the assumption that they have been accrued through employment and therefore should be excluded. This can result in an unfair settlement.
When looking at how pensions are dealt with on divorce or dissolution there are four options:
- Retain own pension assets
- Pension Sharing Order (PSO)
- Pension Attachment Order (PAO)
- Offsetting
Retaining own pensions
In some circumstances it is appropriate for each individual to retain their own pension assets without there being any adjustment. Examples of this may include short marriages/civil partnerships, where individuals have similar pension values and/or are many years from retirement.
Pension Sharing Order (PSO)
A PSO transfers a percentage of a pension from one spouse/civil partner to a pension held by the other. Generally, the aim of pension sharing will be to equalise the pensions.
The benefit of this approach is that once a pension has been shared, the individual receiving a share of the pension will be able to invest the ‘credit’ into a pension of their own choosing and deal with it as they see fit. Equally, the individual whose pension has been ‘debited’ will then be able to deal with the balance of that pension as they wish. This severs the financial ties between the couple.
Pension Attachment Orders (PAO)
This is an order which requires a percentage of a member spouse’s/civil partner’s pension income and/or lump sum to be paid to the other. The Order takes effect when the member spouse starts to receive their pension, at which point part of the lump sum and/or part of the income is paid directly to the non-member.
These orders are less popular than pension sharing orders for the following reasons: (i) a pension subject to a PAO remains that of the member spouse/civil partner. If the member dies, the pension dies with them and the former spouse/civil partner will no longer receive any benefit, (ii) the pension subject to a PAO will be taxed wholly in the hands of the member, which often means more tax is payable. If pension income is shared by way of a PSO, each receiving individual is taxed independently, and (iii) a PAO can lead to uncertainty for both parties.
PAO can be a good option if the member spouse/civil partner is already in receipt of his/her pension but the receiving party is younger and would not be able to draw their share of the pensions for some years to come.
Offsetting
This is where one spouse/civil partner receives a greater share of the liquid assets in order to ‘offset’ their claims on the other’s pension(s). This can be problematic: a pound of cash is not the same as a pound of pension, if cash is received in lieu of pension this can be invested into a pension and tax relief claimed (subject to eligibility). This could enhance the value for the recipient, if the cash received in lieu of pension is not invested into a pension, funds can be taken without a tax liability whereas the spouse/civil partner who receives a pension income will receive said income net of tax.
If offsetting is being considered it will be necessary to obtain expert input from a pension actuary to calculate an appropriate offsetting sum taking into account the issues set out above.
Conclusions
Pensions are a complex but very import aspect of any financial settlement and will need careful consideration. In most cases, expert input from a pensions actuary will be recommended, if not essential, to ensure that costly mistakes are not made.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
