Early retirement
A scheme member who retires before the normal retirement date (NRD) of an occupational pension scheme is recognised as taking early retirement. HM Revenue & Customs will allow early retirement and the taking of a pension income from the age of 50 for men and women.

An employers pension scheme will have rules that determine the generosity of the pension benefits payable to members on early retirement. An individual could retire early voluntarily and this means that the accrued members pension rights will usually be scaled down, typically between 4.0% to 6.0% by each year early retirement precedes the normal retirement age.

If early retirement is due to ill health many schemes will pay benefits the member would have received at normal retirement age based on the current pensionable earnings and without scale down. If early retirement is compulsory such as in the case of redundancy, the scheme may pay an early pension based on accrued retirement benefits without scale down and possible enhancements such as half the years to retirement.

If the member has a money purchase scheme or personal pension, their pension fund can be used to buy an annuity on early retirement and the individual has the option to search for the highest pension annuities using an open market option. If early retirement is due to ill health an impaired health annuity could be purchased. Learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised annuity quote offering guaranteed rates.


Earmarking
Introduced under section 166 of the Pensions Act 1995, as inserted sections 25B to 25D of the Matrimonial Causes Act 1973 (MCA 73) earmarking extended the powers of the court allowing them to earmark the members pension rights for the benefit of the former spouse and has applied since 1 July 1996 in cases where partners in divorce were unable to reach an out-of-court settlement.

Earmarking will apply, as with pension sharing, to divorce and nullity but also to judicial separation. Once the courts have granted the earmarking order, it will not take effect until the retirement age of the scheme member. This means that valuations of the members pension rights using a cash equivalent transfer value (CETV) is of little value as the court concluded in the case of T v T (1998). It will be necessary to use projections to retirement age, produced by the scheme trustees for the pension arrangement which could be an employers pension scheme or a private pensions scheme.

Amendments to earmarking were made in the Welfare Reform and Pensions Act 1999 (WRPA) requiring earmarking orders from 1 December 2000 to be expressed in percentage terms and this can be applied to a pension income, annuity or tax free lump sum, directing the scheme member to make such a commutation as required.


Earmarking limitations
Since before the introduction of earmarking it has been apparent that there were significant limitations to the use of earmarking of a members pension rights for a pension arrangement. As such orders have not been granted in many divorce proceedings to date with family law practitioners preferring the offsetting of other assets against retirement benefits.

This is due to a number of practical problems firstly that earmarking does not allow for a clean break between the partners financially in cases of divorce or nullity of marriage. Within HM Revenue & Customs limits the pension scheme member can deliberately avoid taking benefits until age 75 and therefore deprive the former spouse of an earlier pension income or annuity and if the scheme member dies, no benefits will be paid to the former spouse.

For a money purchase scheme the former spouse has no control over where the money is invested. Where the pension arrangement is a final salary pension the member could deprive the former spouse of a larger pension income at retirement age simply by choosing to opt out and start new post divorce contributions. Furthermore, the earmarking order will be terminated on the remarriage of the former spouse and on payment the pension income or pension annuity will be taxed at the scheme members highest marginal tax rate ignoring the former spouses unused allowances or lower marginal tax rate if applicable.


Earmarking order
The Pensions Act 1995 introduced earmarking and requires that the court has regard to the members pension rights in determining financial settlement on divorce. If the partners on divorce cannot settle out-of-court, the court can grant an earmarking order.

The court will first instruct the scheme member to obtain from the scheme trustees the cash equivalent transfer value (CETV) and in England and Wales this will also include retirement benefits accrued prior to the marriage although in the case of T v T (1998) the court concluded that the CETV was of little value in earmarking cases. Then the pension provider has six weeks to provide the CETV, however the court may require expert evidence to determine the valuation of retirement benefits. This will be an adjusted CETV reflecting the circumstances and needs of the parties and provided usually from a pensions consultant that has the appropriate qualifications such as G60 Pensions to be a pensions expert.

The court will then grant an earmarking order against the members pension arrangement which must be sent to this individual within 7 days of the granting of the order or 7 days after the decree absolute with a copy of the decree nisi (in the case of divorce), decree of nullity or decree of judicial separation. The pension provider must record this order and if the scheme member subsequently transfers retirement benefits to another provider the earmarking order will be attached to the new provider, however, the new provider can refuse the pension transfer due to the extra administrative element of the earmarking attachment.


Earmarking retirement benefits
The earmarking order granted by the court as a result of divorce, nullity or judicial separation could be directed at a specific part of the scheme members pension rights to be paid to the former spouse at retirement age. This can include periodical payments in the form of a pension income from pension annuities or a commutation to a tax free lump sum up to HM Revenue & Customs limits.

The court can override the scheme trustees discretion and include the former spouse as a beneficiary of the lump sum death benefit. However, as per section 25B and 25C of the Matrimonial Causes Act 1973 (MCA 73) an earmarking order may not be made against a pension arrangement if it is currently subject to a pension sharing order.

Ultimately it is important to remember that for any court decision a variation of settlement order can apply to earmarking at any time after the order is granted.


Earnings cap
Prior to A-Day on 6 April 2006, the Finance Act 1989 imposed limits for any post-89 pension scheme members pension arrangement by the earnings cap. The earnings cap limited the taxable earnings of a member that could have been used for pension planning, latterly £105,600 for the 2005/2006 tax year before pension simplification was introduced.

The earnings cap would rise at the retail price index (RPI), which was less than the rise in earnings inflation and resulted in many employees and self-employed eventually exceeding the earnings cap. A pre-89 pension scheme member was not limited to the earnings cap and for an occupational pension scheme could retire on 2/3rds of their final remuneration with no upper limit.