Earmarking orders were once an approach taken by divorcing couples to share their pension pots. Designed to ensure a fair settlement if one party had accumulated a larger pension than the other, earmarking orders enabled a percentage of one spouse’s pension income to be set aside for the other spouse.
However the recent pension shakeup, which provides over 55s with unrestricted access to certain pension pots, has created a loophole which could effectively override these orders.
What do the pension reforms mean?
Previously only 25 per cent of a pension could be withdrawn as a lump sum, with the remaining monies used to purchase an annuity, but individuals can now choose to cash in their whole pension pot instead.
While the changes give pension policy holders a greater degree of flexibility when managing their pension funds, it also means that divorcees could possibly cash in their pensions in their entirety and deprive their former spouse of the income provided for an earmarking order.
Will the changes affect me?
The effect of a cash withdrawal from a pension fund will depend on the precise wording of the original earmarking order.
If an individual chooses to take advantage of the pension reforms and cash in their entire pension fund, the money will be treated as a capital sum as opposed to an annuity income. This means that if your earmarking order relates only to pension income and neglects to provide for scenarios where the money is a lump sum of cash, your order could be unenforceable.
It is therefore vital that expert legal advice is sought to ensure that any earmarking order in place effectively protects you against this potential loophole in the law.
For more information on earmarking orders, or to discuss any aspect of family law please contact Damian Baron on 01772 258321