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  Procedures and Limitations   "Earmarking a pension does
not result in a clean break

An earmarking order does not take
effect when it is granted by the court, it becomes effective only at the retirement date of the scheme member. This is not necessarily a fixed date as the member may retire later than expected and is a drawback of earmarking as it does not result in a clean break for a spouse.
  Introduction   Limitations   Earmarking & pension sharing orders
  Procedures   Retirement benefits   

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Introduced under section 166 of the Pensions Act 1995, as inserted sections 25B to 25D of the Matrimonial Causes Act 1973 (MCA 73), an earmarking order gives the courts the power to earmark the members pension rights. This order will benefit the former spouse and has applied since 1 July 1996 in cases where partners in divorce were unable to reach an out-of-court settlement. Earmarking will apply, as with pension sharing, to divorce and nullity but also to judicial separation. Once the courts have granted the earmarking order, it will not take effect until the retirement age of the scheme member.

This means that a valuation of the members pension rights using the scheme administrators cash equivalent transfer value (CETV) is of little value for earmarking orders as the court concluded in the case of T v T (1998). It will be necessary to use projections to retirement age, produced by the scheme trustees for the pension arrangement which could be an employers pension scheme or a private pension scheme.

Amendments to earmarking were made in the Welfare Reform and Pensions Act 1999 (WRPA 99) requiring earmarking orders from 1 December 2000 to be expressed in percentage terms and this can be applied to a pension income or tax free lump sum, directing the scheme member to make such a commutation as required.

The Pensions Act 1995 introduced earmarking and requires that the court has regard to the members pension rights in determining financial settlement on divorce. If the parties on divorce cannot settle out-of-court, the court can grant an earmarking order.

The court will instruct the scheme member to obtain from the scheme administrators the CETV method used for the valuation and in England and Wales this will also include retirement benefits accrued prior to the marriage. The pension provider will then have six weeks to provide the CETV as the step-by-step guide shows, however the court may require projections to retirement age from the provider or expert evidence to determine the valuation of retirement benefits, usually from an independent financial adviser (IFA) that has the appropriate qualifications to be a pensions expert.

When the court grants an earmarking order against the members pension arrangement it must be sent to this individual within 7 days of the granting of the order or 7 days after the decree absolute together with a copy of the decree nisi, decree of nullity or decree of judicial separation. The pension provider must record this order to be applied at the members retirement date.

If the scheme member subsequently transfers retirement benefits to another provider the earmarking order will be attached to the new provider, however, the new provider can refuse the pension transfer due to the extra administrative element of the earmarking attachment.

Retirement benefits
The earmarking order granted by the court could be directed at a specific part of the scheme members pension rights to be paid to the former spouse at retirement age and these could be the pension income, tax free lump sum or lump sum death benefit.

For example, an earmarking order paying a former spouse 30% of the members pension income would come into effect when the husband chooses to retire, although she would not receive the benefits if he dies or if she remarries. The court may decide that a percentage, say 60%, of the tax free lump sum would be more appropriate. Therefore the former spouse could receive 60% of the members tax free lump sum when the husband chooses to retire.

The court can override the scheme trustees discretion and include the former spouse as a beneficiary of the lump sum death benefit. Applying an earmarking order to the lump sum death benefit could be advantageous where the former spouse is receiving maintenance payments from the husband. In this case the court could earmark 100% of the lump sum death benefit so if the husband dies, the former spouse will receive these benefits as compensation for the lost maintenance income. Ultimately it is important to remember that a variation of settlement order can apply to earmarking at any time after the order is granted.

Earmarking and pension sharing orders
An earmarking order cannot be made where there is a pension sharing order applied to the pension arrangement, as stated in section 25B and 25C of the MCA 73. This restriction only applies to the pension sharing order relating to the existing marriage so it would be possible to apply an earmarking order to a previous marriage that was subject to a pension sharing order. As a result of this legislation it will not be possible for a former spouse to apply for an earmarking order against the lump sum death benefit where the pension arrangement is also subject to a pension sharing order. This means it is not possible to secure the continued payment of maintenance to a spouse in the event of death of the former partner.

A pension sharing order cannot be made where there is an existing earmarking order applied to a pension arrangement, as stated in section 24B of the Matrimonial Causes Act 1973. The Act does not specify to apply only to existing marriages and therefore it can apply to any marriage with an earmarking order. In his article "A Practitioner's Guide to Pension Sharing Part 1" [2000] Fam Law 489, David Salter shows that the scheme member can avoid a pension sharing order to the detriment of the current partner by transferring the retirement benefits to a pension arrangement already subject to an earmarking order.

Since before the introduction of earmarking it has been apparent that there were significant limitations to the use of earmarking of a members pension rights for a pension arrangement. As such orders have not been granted in many divorce proceedings to date with family law practitioners preferring the offsetting of other assets against retirement benefits.

This is due to a number of practical problems. Firstly earmarking does not allow for a clean break between the partners financially in cases of divorce or nullity of marriage. Within Inland Revenue limits the pension scheme member can deliberately avoid taking benefits until age 75 and therefore deprive the former spouse of an earlier pension income. Also if the scheme member died no benefits will be paid to the former spouse.

For a money purchase scheme the former spouse has no control over where the members money is invested and for a final salary scheme the member could opt out and start new post divorce contributions, therefore depriving the former spouse of a larger pension income at retirement age. Also, the earmarking order will be terminated on the remarriage of the former spouse and on payment the pension will be taxed at the scheme members highest marginal tax rate, ignoring the former spouses unused allowances or lower marginal tax rate if applicable.

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