There are two main alternatives to pension sharing: earmarking and offsetting.
Earmarking is where some of the payments from one partner’s pension must legally be paid to the other one, though the pension remains in the original person’s name. That person also retains control of things like the retirement date.
Earmarking is very rarely used in practice nowadays, according to Hannah Foxley, Chartered financial planner at The Women’s Wealth Expert.
The advantage of earmarking is that no cash has to immediately change hands and this can be of benefit in a situation where the pension fund does not have any readily realisable assets, for example if the sole asset of the pension is the company’s own property.
The other benefit is that it can protect against future claims as a pensions sharing order cannot be attached to a pension fund where there is an earmarking order.
If these are the positives, according to Ms Foxley there are significant disadvantages to earmarking:
• It does not allow a clean break as the parties will have to stay in touch for years after the divorce.
• If the member dies, the benefits will be lost.
• Remarriage invalidates an earmarking order and so benefits will be lost.
• The non-member cannot receive their benefits until the member retires.
• The non-member is effectively taxed at the member’s tax rate on the income.
• The non-member has absolutely no control over what happens with the fund .
* It is difficult to transfer a pension with an earmarking order attached.
• The basis of benefits under the scheme may change between the order being granted and actual retirement.
Offsetting
Offsetting is simply a trading of assets between divorcing parties. It is common, for example, for the marital home to be exchanged for pension rights. This is not covered by pension legislation as it is merely an exchange of assets.
Before the Pensions Act 1995, offsetting was the only way in which pension assets could be dealt with. An advantage is that it allows a clean break.
The disadvantage of this, according to Ms Foxley, is that it means that one party may have no pension fund and have no prospect of future security.
With offsetting, for example, if the house is worth £200,000, the pension is worth £150,000, there are no other assets and the courts award a settlement of 50 per cent, then the member could keep the pension and receive £25,000 from the equity in the house.
Clare Moffat, technical manager of Prudential, said offsetting is still very popular, especially with high net worth individuals.
“It can seem sensible if there are a large amount of assets. However, although at the time of the divorce it may seem a good idea for the ex-spouse to have the house and the member to keep the fund, the disadvantage is that at retirement the ex-spouse will have no retirement income.”
