The introduction of the new Pension Freedoms on 6 April 2015, allowing some pension holders to encash the whole of their pension fund (subject to income tax), has had some unforseen consequences for people whose historic divorce settlements incorporated a pension attachment (or earmarking orders as they were commonly known).
After 1 July 1996 it became possible to make pension attachment orders. This was a way to ‘attach’ a periodical payment (otherwise known as maintenance) order or lump sum order to a pension, once it was in payment. Before the introduction of pension sharing orders on 1 December 2000, this was the only way to divide pension assets. Many thousands of these orders were made in the four year period between 1996 and 2000.
After 2000 and the introduction of pension sharing orders, as a result of the Welfare Reform and Pensions Act 1999, those settling their divorces largely chose to use the pension sharing order as an alternative to pension attachment as it was seen as a much ‘cleaner’ way to divide pensions. It enabled an entirely new and separate pension arrangement to be set up using a percentage of the original pension fund, which was shared by the pension holder with their spouse. This arrangement also facilitated a clean break between the parties, at least from the point of retirement, as there was no reliance on maintenance or a lump sum being paid from the pension pot on retirement, as there had been with pension attachment orders.
Some fifteen to nineteen years have passed and large numbers of the pension attachment orders are now coming to fruition, with the attached lumps sums and periodical payments becoming due for payment.
In the wake of the new Pension Freedoms, some problems in the interpretation of the pension attachment orders have materialised. These stem from the fact that at the time of the orders being made the maximum tax-free cash payable on retirement was typically 25%. In cases where there was an attachment of a lump sum payable from the pension, the order would usually be worded in such a way that the pension holder would be required to commute the ‘maximum lump sum available’ from the pension and pay it to the spouse. Therefore a 25% portion of the fund would have been envisaged at the time of settlement, but now in the context of the new Freedoms on defined contribution schemes such as personal pensions, many pension providers are interpreting the ‘maximum lump sum available’ provision as meaning 100% of the fund. This is due to the new freedom of a pension holder to be able to encash the whole of their pension fund.
This also has repercussions for the recipient of a periodical payments (or maintenance) attachment order, because the pension holding spouse could take the whole fund as a lump sum, leaving no fund from which to pay maintenance, as was intended at the time of settlement.
These changes therefore pose serious risks for those spouses who have been expecting to rely on pension attachment arrangements that were entered into at the time of their divorce settlement. It is possible that those facing the difficulties described above will be able to take steps to rectify the problem by making an application under section 31 of the Matrimonial Causes Act 1973, to vary the attachment order. If such an application was successful it would be possible for the pension attachment lump sum and periodical payment orders to be varied or discharged.
Pension holding spouses who are concerned about a lump sum attachment of 100% of their pension fund being made to their ex, may also want to consider a transfer to an alternative scheme if the existing provider will not give effect to the intention of the attachment order, at the time of the divorce settlement.
Recipient spouses who are concerned about their ex taking a lump sum on retirement equivalent to 100% of the pension fund, leaving no capital in the pension from which to pay out maintenance, may need to think ahead and consider taking out an injunction to stop this happening.
If you have a pension order which has not yet been implemented, you may want to check if it refers to pension attachment and if so you may want to seek legal advice. Please get in touch and we would be happy to advise and help you to address your concerns.