Pension freedoms could leave divorcees out of pocket

1st May 2015


Divorcing couples who believe they are going to get their hands on their spouse’s pension could find themselves out of pocket thanks to pension freedom.


An unintended consequence of the pension freedoms, which give over-55s access to their defined contributions pensions as cash, is in divorce cases. A pensions earmarking order, which provides the ex-spouse with a fixed percentage of their pension income in retirement, should be checked to ensure their benefits are protected.


Now the retiree no longer needs to turn their pension into income, there is a concern that they will take the pension as a lump sum, leaving their ex-spouse with nothing.


After the family home, pensions are typically the biggest asset people have and often form part of a divorce settlement.


Pensions are carved up in two ways, said Jon Greer, pensions expert at Old Mutual Wealth.


The first is pension earmarking where an ex-spouse is entitled to a set percentage of a pension income. The second is pension sharing, where the cash equivalent transfer value on the member’s pension is allocated for the ex-spouse, offering a clean break.


Pension sharing is the most popular method used today but there are still a number of earmarking orders in force and Greer said individuals should check immediately to see that their rights are protected.


‘A number of people would have set up pension earmarking, when it first became possible, around 20 years ago, and the majority of these orders would have been for the benefit of the ex-wife,’ said Greer.


‘It is important that these women act promptly, especially if their ex-husband is approaching retirement age, to check their earmarked rights are protected.


‘They need to ensure that where they have a right to a percentage of the retirement income they receive the same benefit if their ex-husband takes all the pension money out as cash instead of as an income.’



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