Earmarking is ignored in valuing a member’s pension for the purposes of the lifetime allowance.
In England and Wales the court order automatically lapses on the ex-spouse’s remarriage or on the pension holder’s death. This provision applies even if payments have already started after the pension holder’s retirement.
Potential drawbacks of earmarking
There have been relatively few earmarking orders, even though it has been available for some time. Earmarking involves several problems, for example:
- It cuts across the ‘clean break’ principle.
- The pension holder can decide when to draw their benefits and thus when the ex-spouse is to receive benefit through earmarking. Changes introduced from April 2011 would, in theory, allow the pension holder to decide to leave their pension fund untouched until their death, whenever that occurs.
- The benefits payable to the ex-spouse cease when the pension holder dies, which could mean that the ex-spouse receives no benefits whatsoever.
- The ex-spouse has no control over how any defined contribution funds are invested. A member of a final salary scheme could reduce benefits by opting out and starting a new post-divorce pension plan.
- There is a clear incentive to cohabitation in the automatic termination of the court order on remarriage.
- The entire pension is taxed as the pension holder’s and earmarked payments are made from their net pension income. This may not be tax-efficient for the ex-spouse, who might have a lower marginal tax rate or unused allowances.
The information given does not provide specific advice and may not be suitable to your individual circumstances.
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