A scheme member who retires before the normal retirement date
(NRD) of an occupational
pension scheme is recognised as taking early retirement.
HM Revenue & Customs will allow early retirement and the taking
of a pension income from the age of 50 for men and women.
pension scheme will have rules that determine the generosity
of the pension benefits payable to members on early retirement.
An individual could retire early voluntarily and this means
that the accrued members
pension rights will usually be scaled down, typically
between 4.0% to 6.0% by each year early retirement precedes
the normal retirement age.
If early retirement is due to ill health many schemes will
pay benefits the member would have received at normal retirement
age based on the current pensionable earnings and without
scale down. If early retirement is compulsory such as in the
case of redundancy, the scheme may pay an early pension based
on accrued retirement
benefits without scale down and possible enhancements
such as half the years to retirement.
If the member has a money purchase scheme or personal pension, their pension fund can be used to buy an annuity on early retirement and the individual has the option to search for the highest pension annuities using an open market option. If early retirement is due to ill health an impaired health annuity could be purchased. Learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised annuity quote offering guaranteed rates.
Introduced under section 166 of the Pensions Act 1995, as
inserted sections 25B to 25D of the Matrimonial Causes Act
1973 (MCA 73)
earmarking extended the powers
of the court allowing them to earmark the members pension
rights for the benefit of 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 valuations of the members pension rights using a cash equivalent transfer
is of little value 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
Amendments to earmarking were made in the Welfare Reform
and Pensions Act 1999 (WRPA) requiring earmarking orders from 1 December
2000 to be expressed in percentage terms and this can
be applied to a pension income, annuity or tax free lump sum, directing
the scheme member to make such a commutation as required.
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 that
earmarking does not allow for a clean
break between the partners financially in cases of divorce
or nullity of marriage. Within HM Revenue & Customs limits the pension
scheme member can deliberately avoid taking benefits until
age 75 and therefore deprive the former spouse of an earlier pension
income or annuity and if the scheme member dies, no benefits will
be paid to the former spouse.
For a money purchase scheme the former spouse has no control
over where the money is invested. Where the pension arrangement
is a final
salary pension the member could deprive the former spouse
of a larger pension income at retirement age simply by choosing
to opt out and start new post
divorce contributions. Furthermore, the earmarking order
will be terminated on the remarriage of the former spouse
and on payment the pension income or pension annuity will be taxed at the scheme members
highest marginal tax rate ignoring the former spouses unused
allowances or lower marginal tax rate if applicable.
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 partners on divorce cannot settle out-of-court, the
court can grant an earmarking order.
The court will first instruct the scheme member to obtain
from the scheme trustees the cash equivalent transfer value
(CETV) and in England and Wales this will also include retirement
benefits accrued prior to the marriage although in the case
of T v T (1998) the court concluded that the CETV was of little
value in earmarking cases. Then the pension provider has six
weeks to provide the CETV, however the court may require expert
evidence to determine the valuation of retirement benefits.
This will be an adjusted
CETV reflecting the circumstances and needs of the parties
and provided usually from a pensions consultant that has the
appropriate qualifications such as G60 Pensions to be a pensions
The court will then grant an earmarking order against the
members pension arrangement which must be sent to this individual
within 7 days of the granting of the order or 7 days after
absolute with a copy of the decree
nisi (in the case of divorce), decree of nullity or decree
of judicial separation. The pension provider must record this
order and 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
The earmarking order granted by the court as a result of divorce, nullity or judicial
separation could be directed at a specific part of the
scheme members pension rights to be paid to the former spouse
at retirement age. This can include periodical payments in
the form of a pension income from pension annuities or a commutation to a tax free
lump sum up to HM Revenue & Customs limits.
The court can override the scheme
trustees discretion and include the former spouse as a
beneficiary of the lump sum death benefit. However, as per
section 25B and 25C of the Matrimonial Causes Act 1973 (MCA
73) an earmarking order may not be made against a pension
arrangement if it is currently subject to a pension
Ultimately it is important to remember that for any court
decision a variation
of settlement order can apply to earmarking at any time
after the order is granted.
Prior to A-Day on 6 April 2006, the Finance Act 1989 imposed limits for any post-89 pension scheme
members pension arrangement by the earnings
cap. The earnings cap limited the taxable earnings of a
member that could have been used for pension planning, latterly £105,600
for the 2005/2006 tax year before pension simplification was introduced.
The earnings cap would rise at the retail
price index (RPI), which was less than the rise in earnings
inflation and resulted in many employees and self-employed
eventually exceeding the earnings cap. A pre-89 pension
scheme member was not limited to the earnings cap and for an
occupational pension scheme could retire on 2/3rds of their final remuneration with no upper limit.