The member retains ownership of the whole pension but the earmarking order simply allows the court to direct the pension provider to pay some of the benefits to the ex-spouse.

It must be expressed as a percentage for both DB and DC schemes.

There are two types:

1. Earmarked periodic payment order – The court order is for the income payments

a. the payment to the ex-spouse will commence when the member starts to take their own benefits;

b. the payment to the member is reduced accordingly;

c. the order is expressed as a percentage of the member’s pension; and

d. a separate order is required for each pension arrangement held by the member.

e. The income is taxed as if the member received the whole payment but the ex-spouse cannot claim any excess tax paid

2. Earmarked lump sum – The court order is for the member’s PCLS

a. the payment is made when the member comes to draw their retirement benefits; and

b. the lump sum may be in addition to the pension, or in return for a reduced pension.

Disadvantages:

• The benefits earmarked for the ex-spouse do not become payable until the member secures their benefits.
• The courts have no power to set a date by which the member must take their and if the member does defer taking the benefits, which they can even beyond age 75, this can have a significant impact on the value of the earmarking order to the ex-spouse.
• Pension benefits with earmarking orders attached to them may be transferred from one scheme to another.
  • The ex-spouse has no control over this
  • Where all the benefits are transferred, the ex-spouse is notified by the original scheme so that they can apply for a variation of the original order.
  • However, where only part of the benefits is transferred the order does not transfer to the new scheme and the ex-spouse can only claim against the original scheme.
  • This means they must claim the balance owed from the member.
• It is easy for the ex-spouse to lose track of the earmarking order, particularly if they change address, because the scheme is only required to write to them at the last known address.
• The ex-spouse has no control over the member’s investment decisions.

It can also lead to issues upon death or re-marriage:

a. If the member dies

i. Earmarked periodic payment order ends and ex-spouse loses the benefit, whether death occurs before payment starts or once it has commenced.

ii. The lump-sum order can theoretically survive the death of the member, but it is often not possible for this benefit to be paid out, i.e. if the scheme in question is a defined benefit scheme.

iii. If the death in service benefits are earmarked these will be paid out on the member’s death providing this happens before they have taken their benefits.

b. If the ex-spouse dies

i. The order for periodic payments will cease

ii. The lump sum order may remain and will be payable to the estate, only once the member draws the benefits

c. Member remarries

i. The earmarking order continues

d. Ex-spouse re-marries

i. Earmarked periodic payments no longer have any legal standing

ii. The lump sum remains in place

iii. Even co-habitation can break the earmarking order

Advantages for the member:

• No money changes hands at the point of divorce
• The earmarking order may cease if situation happen (see disadvantages)
• The member retains control over the pension including investment options and timings

Impact on the LTA

Earmarking has no direct impact on the LTA.

However as the pension is still owned fully by the member so it will be tested on their LTA when benefits are taken.

Therefore the benefits which the ex-spouse receives will not be tested on their LTA.