Earmarking was introduced by The Pensions Act 1995. It can be used for divorce petitions presented on or after 1 July 1996 (10 August 1996 in Northern Ireland and 19 August 1996 in Scotland), where the relevant pension benefits come into payment on or after 6 April 1997. 

For England, Wales and Northern Ireland, earmarking can apply to pension and lump sum benefits. In Scotland, only lump sum benefits can be earmarked. Earmarked lump sums can include lump sum death benefits, as well as those payable in the members lifetime.

Earmarking enables the court to direct the trustees of a pension scheme to make payments to an ex-spouse from the date the member draws benefits or dies. However, the member’s pension rights are not otherwise affected – the pension remains in the original members name, the member retains control over the benefits and the benefits are tested solely against the members lifetime allowance and income tax position when eventually accessed.

Problems with Earmarking (Pension Attachment) orders

Whilst the introduction of earmarking was a major advance, it does still leave several problems, not least because it does not allow for a clean break between the divorcing couple financially. Some specific problems would be:

• The ex-spouse receives no benefit until the member decides to access the pension
• The ex-spouse has no input as to how the pension is invested
• The ex-spouse has no say in how the member decides to access the pension
• If the member dies before accessing the pension, the ex-spouse can receive no benefit
• When the member dies after taking benefits, any earmarked pension income that the ex-spouse is receiving will stop 
• If the ex-spouse remarries, any pension benefits under the earmarking order normally end
• All benefits are taxed as if they are due to the member. This can result in higher rate income tax or lifetime allowance charges, even though the ex-spouse may be a low earner with little in the way of pension provision
• Any further pension accrual will form part of the earmarked benefits. This may result in the member opting out of a workplace pension or ceasing contributions, to avoid the ex-spouse from benefiting further. 

Earmarking orders can be adversely affected when pension legislation changes. For example, many existing orders award a percentage of the member’s maximum lump sum entitlement to the ex-spouse. Although the original intention was to award just the tax free cash entitlement, the wording can mean some orders now inadvertently cover the whole fund - as pension freedoms now enable the whole fund to be taken as an Uncrystallised Funds Pension Lump Sum (UFPLS).

Unlike a pension sharing order, an earmarking order can be amended after the decree absolute is granted. This means that where circumstances have changed, it can be possible to apply to the court for a variation on the order to reflect those changes.

Comment

Earmarking orders do not allow a clean break between divorcing couples. A financial relationship will persist for many years until the order has been fully satisfied. Since pension benefits under the order terminate if the ex-spouse decides to remarry, this can further prevent them from moving on. 

Earmarking orders are also very easy to manipulate. The pension scheme member can deliberately avoid taking benefits and if they die, the ex-spouse can often receive nothing.

Today, many divorcing couples will opt for a pension sharing order. Earmarking/ pension attachment orders will typically only be used in limited circumstances, such as where a pension has very illiquid assets (such as a SSAS investing in a company property) or where an annuity is already in payment and it is not possible to secure the same income using a pension sharing order. 

LV specific information

LV= will not accept any pension business containing an earmarking/pension attachment order. Our systems are not set up to administer these and after pension freedoms blurred the difference between lump sum and income benefits, many existing orders can now prove very difficult to interpret.