What’s a pension attachment or earmarking order?
If you’re going through a divorce, you may hear reference to ‘pension attachment orders’ and ‘pension earmarking’. These are two different ways of describing a very similar process. In Scotland, an ‘earmarked’ pension refers to the proportion of an individual’s pension owed to their former partner when they begin withdrawing. In England, Wales and Northern Ireland, this is known as ‘pension attachment’.
How do pension attachment orders work?
A pension can be one of your biggest assets and so will often be discussed in court proceedings during a divorce. In pension attachment and earmarking, the court will order that part, or all, of one person’s private pension will be paid to the other person. The pension policy will still be in the original owner’s name, but their scheme must make sure that the correct amount’s kept aside to pay out to the ex-partner. In other words, this is the part of the pension that’s been ‘earmarked’.
In England, Wales and Northern Ireland, the court can order one or a combination of the following:
- All or part of an individual’s pension incomes paid to their ex-partner
- All or part of their pension tax-free cash‘s paid to their ex-partner
- All or part of their lump sum upon death’s paid out to their ex-partner.
The main difference in Scotland is that the order can only include one, or both of the individual’s tax-free cash, and any lump sum upon death.
What to be aware of with pension attachment and earmarking orders
When you’ll get your ‘earmarked’ savings
If a court has ordered that you’re to be paid a proportion of your former partner’s pension, you’ll only receive your share when they begin withdrawing their retirement savings or upon their death. The earliest they’ll be able to withdraw’s when they reach the age of 55 (rising to 57 from 2028). The decision of when to withdraw’s entirely up to the policyholder after that age, so you’ll have to wait for them to retire before you receive your earmarked funds in the pension.
What happens if you remarry?
If you remarry or enter a new civil partnership, you must notify the pension scheme you’re receiving earmarked funds from. If you’re receiving regular payments as part of your pension attachment order, these will be stopped. If you’re due to receive your proportion as a lump sum, this will depend on the terms set out when the order was made.
What happens if you die?
Upon your death, a representative will need to inform the pension scheme within 14 days. As with remarriage, regular payments from a pension attachment order will be stopped, and any lump sum payments will be specific to the terms that were set out.
What if your ex-partner transfers their pension?
A pension attachment or earmarking order doesn’t usually affect your former partner’s right to transfer their pension, as long as they notify you. However, in some cases, they may need your consent to make the transfer.
When someone transfers their pension, any pension attachment orders will normally move with it. The new scheme will be responsible for implementing the terms and making sure that payments are made when the pension’s at the withdrawal stage.
If your ex-partner decides to make a partial transfer and leaves the pension to which the order’s attached open, then the proportion owed to you will remain in the old scheme, though they should still notify you that this transfer’s taking place.
Can my ‘earmarked’ savings be reduced?
The amount of money that you receive can vary based on a number of factors. In the case of a defined contribution pension, it’ll depend on how much longer your former partner decides to contribute to that pension and how well its investments perform. As with all investments, there’s risk, so there’s a chance that the amount that you’re left with could be higher or lower than what was in the pension when the agreement was made.
Under some circumstances, there may be a reduction in the amount you were expecting if your pension attachment order was applied to a defined benefit pension. Pension income in these types of schemes is based on the amount someone’s paid, so if your former partner’s salary’s reduced, they may also see a reduction in their pension benefits, which in turn could affect your earmarked portion. There may also be reductions if your ex-partner unexpectedly takes early retirement, or if the pension scheme enters the Pension Protection Fund (PPF). If this happens, you may want to get legal advice as it might be possible to get a variation on the earmarking or attachment order.
If you had a pension attachment or earmarking order before April 2015, then it may not have taken into account the flexibility that’s offered by pension freedoms. If this is the case, you may want to consider getting legal advice to see if amendments can be made in your agreement to reflect modern pension reforms.
When will I get my earmarked savings?
It’s the responsibility of the pension scheme to manage pension attachment orders and pay them out at the appropriate time. You’ll start to receive your earmarked part of the pension either when your former partner starts withdrawing, or upon their death. Remember, the earliest they can start withdrawing is aged 55 (rising to 57 from 2028).
What are the advantages of a pension attachment order?
- If your ex-partner continues to make contributions to the pension, the amount you’ll receive could grow.
- If the pension’s transferred, the rights to your portion will transfer with it.
- Any death in service benefits can also be earmarked.
- Can apply to tax-free cash benefits and pension income.
- Your earmarked savings will still be classed as taxable income for the policyholder, therefore you shouldn’t need to declare your share to HMRC for tax purposes.
- Any benefits are tested against the policyholder’s lifetime allowance. Therefore there’s no lifetime allowance check on the person receiving earmarked savings.
What are the disadvantages of a pension attachment order?
- You may not get your share of the pension if you remarry, enter a new civil partnership, or pass away.
- The receipt of your earmarked savings is dependent on when the pension owner decides to withdraw.
- You’ve little control over the amount you’ll receive. This can be affected by your former partner’s investment decisions, the amount in contributions they make and if they decide to retire early.
- Payments to you will stop when your former partner dies. If they die before they reach retirement, you could receive nothing.
- You might need to stay in touch with your ex-partner after the divorce’s finalised, leaving less chance of a clean break.
How do pension attachment orders and earmarking differ from pension sharing orders?
In a pension attachment or earmarking order, a part of your former partner’s pension will be reserved for you, but will stay in their name and will only be released to you upon their retirement. The difference with a pension sharing order (PSO) is that the proportion of pension you’re entitled to will be made immediately available to you to either set up an account in your own name within that scheme, or to transfer to another pension scheme. This has the advantage of offering you a clean financial break after your divorce.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 15-05-2023