As I mentioned in a previous blog, Divorce – Who Gets What, the division of wealth after a separation adds an enormous stress factor to an already difficult process. After the family home, pensions are often the second most valuable asset under consideration. In the event of judicial separation, divorce, dissolution of a civil partnership or ending of a relationship with a qualified cohabitant, Pension Adjustment Orders are required to divide pension benefits. This binding court order requires a pension administrator to pay part or all of a member’s retirement benefits to the former spouse or partner. So, how do Pension Adjustment Orders (PAO) work?
An earmarking court order is one that refers to retirement benefits when they become payable in the future. The amount of the retirement benefit which will be paid to the PAO beneficiary at retirement is based on two key decisions by the court:
- What specific percentage of pension benefit is payable, and,
- To what exact period of time this applies (usually the period of marriage).
The PAO does not provide any share of the retirement benefits built up by contributions paid either before or after the relevant period specified in the PAO. A PAO if often deemed unchangeable but if it is subject to future variation, either party can, at a later date, ask the court to have the PAO changed or abolished entirely.
Earmarking means waiting for the individual to take his or her retirement benefits before getting a share of their retirement benefits, leaving the beneficiary with no way of controlling investment choices or timing of retirement.
The alternative, if the retirement benefit has not yet become payable, is to take a transfer value of his or her share of the fund into a new pension in his or her own name. This is called splitting.
Other Key Points
- Separate PAOs are required for each separate private pension arrangement that exists.
- A retirement benefits PAO does not cease on the death or remarriage of the beneficiary.
- A contingent benefits PAO (relating death in service benefits) ceases on the death or remarriage of the beneficiary.
- An ARF or AMRF cannot be subject to Pensions Adjustment Orders, a Property Adjustment Order is used instead.
- Tax on any excess above pension thresholds must now be shared by both parties to reflect the split in retirement benefits.
- For more information have a look at this Citizens Information page.