July 2006

61.20 Pensions and divorce/dissolved civil partnership - earmarking

Until 1996, the only way pensions could be taken into account during divorce was to offset their value against the value of other financial assets to compensate the ex-spouse for the loss of pension benefits. Section 166 of the Pensions Act 1995 (which came into effect on 1 July 1996) introduced earmarking, which is a term used to describe special attachment orders made by the court. When an earmarking order is made, the pension still remains in the name of the same individual but the occupational pension trustees, administrator, or the personal pension provider is required to make some form of payment to the former spouse (or civil partner - see below) when the member’s benefits become payable. The making of an earmarking order gives pension rights to the ex- spouse/ former civil partner. When an earmarking order has been made there are circumstances where the former spouse or former civil partner will lose the pension rights, e.g. if they remarry or form another civil partnership, or the pension holder dies.

The earmarking provisions apply to civil partners after 5 December 2005

If the spouse or civil partner becomes bankrupt and section 11 of WPRA 99 applies, all rights which arose under an earmarking order will now be excluded from the bankruptcy estate. If a bankrupt is party to an earmarking order the official receiver should obtain details of the pension arrangement and he/she should verify that it is an approved pension arrangement, using the guidance in paragraph 61.4.

For those cases where the petition was presented before 29 May 2000 the rights under the earmarking order will vest in the trustee.

61.21 Pension anddivorce/dissolved civil partnership - pension sharing

Pension sharing was introduced in section 19 of the Welfare Reform and Pensions Act 1999 (which amended the Matrimonial Causes Act 1973) and is available in all divorce and nullity proceedings which began on or after 1 December 2000 and applies to civil partnerships with effect from 5 December 2005. It provides for clean break settlements by means of pension sharing whereby the ex-spouse/former civil partner would become entitled to benefits in their own right, debited from the rights of the scheme member. Pension sharing cannot be applied retrospectively. Therefore a pension which forms part of the bankruptcy estate is unlikely to be the subject of a pension sharing order. Pension sharing can be ordered by the court for most pension arrangements including the State Second Pension scheme (S2P) (formerly SERPS), but excluding the basic state pension.

Where the rules of the pension arrangement allow it, the money can be transferred within the same occupational pension scheme so that the ex-spouse/former civil partner of the pension scheme member effectively becomes a member in his/ her own right. Otherwise the funds can be transferred externally to a personal pension plan. Funds from a personal pension (including a stakeholder pension see paragraph 61.3) can be transferred to a separate pension with the same or a different pension provider.

Pension sharing is not compulsory. It will still be possible to offset pension rights against other assets or to use current earmarking and attachment arrangements as detailed in paragraph 61.20. Where a pension is divided under the new pension sharing provisions, the rights of the member are reduced by way of a pension debit and the ex-spouse/former civil partner is granted a pension credit. Where a bankrupt is entitled to a pension credit, he/she is treated as having a right under an approved pension arrangement which is excluded from the bankruptcy estate. The official receiver should in such cases seek verification that the pension is an approved pension arrangement as detailed in section 11 of the WRPA 1999 - see paragraphs 61.4 to 61.6.

If it is considered that there may have been excessive contributions into the pension and the pension sharing provisions have been applied reference should be made to paragraph 61.12.

For further information on pension sharing see www.sharingpensions.co.uk

61.22 Pension and divorce/dissolved civil partnership - clean break settlements

Where a bankrupt has entered into a clean break divorce settlement prior to the bankruptcy, his/her non-bankrupt ex-spouse/former civil partner may not seek to re-open the settlement in order to attempt to enforce a claim for a greater share of the matrimonial/partnership assets (including pension policies) than had been awarded under the original clean break settlement. (Roberts v Nunn [2004] All ER 233). The clean break consent order in this case was entered into prior to the pension sharing legislation introduced in the Welfare Reform and Pensions Act 1999.

[Back to Part 1 - Bankruptcy - Personal pensions - Bankruptcy Petition on or after 29 May 2000] [On to Part 3 -Bankruptcy - Pension schemes - Bankruptcy Petition before 29 May 2000]