Can earmarking be achieved without going to court?
It is not possible to for a couple during divorce to use earmarking without going to court. With other matrimonial assets such as the family home the rights can be transferred to one spouse or the other as agreed between the parties and recorded through their solicitors without going to court. However, to divide retirement benefits there must be a court order and this includes both earmarking and pension sharing.

In the case of an earmarking order the provider must make a special provision to record the earmarking attachment as this will not be implemented until the scheme members retirement age. The court proceedings shown in the step-by-step guide do not have to be contested so the parties can come to an agreement through their solicitors but they will require a financial order from the court to implement their wishes, this usually being completed at the first appointment or financial dispute resolution (FDR) stages during ancillary relief proceedings.


What retirement benefits can be earmarked?
An earmarking order can be applied to the pension income, tax free lump sum or lump sum death benefits that are part of the members pension rights. For example, an earmarking order paying a former spouse 45% of the members pension income would be applied when the husband decided to retire, although she would not receive the benefits if he dies or she remarries. The court could decide that a percentage, say 70%, of the tax free lump sum would be appropriate.

Therefore the former spouse could receive 70% of the members tax free lump sum when the husband decides to retire and this would be paid even if she remarries. Where the former spouse receives maintenance payments, the court could decide to protect this income on the husbands death and apply an earmarking order of 100% against the lump sum death benefit. In this case the court can override the scheme trustees discretion for the payment of lump sum death benefits to beneficiaries.


Where do the pension benefits come from?
An earmarking order will secure pension benefits for the former spouse from the members pension rights at the time of divorce but these benefits will not be implemented until the scheme member chooses to retire. Also, the pension arrangement itself will determine the type of benefits that can be offered to the former spouse.

For example, a defined benefit occupational pension scheme can offer a pension income, tax free lump sum and lump sum death benefit whereas private pensions such as stakeholder pensions will only provide a pension income and tax free lump sum. The pension benefits eventually paid will depend on the benefits accrued up to the divorce and continued contributions made. This means the scheme member can stop contributing to the earmarked scheme and starts contributing to a new scheme resulting in reduced benefits to the former spouse.


Is pension sharing and earmarking possible?
It will not be possible to apply an earmarking order where a pension sharing order already applies to a pension arrangement for an existing marriage, as stated in the Matrimonial Causes Act 1973 (MCA 73). In this case the former spouse will not be in a position to apply for an earmarking order against the lump sum death benefit to protect any maintenance payments in the event of the scheme members death.

This restriction only applies to the pension sharing order relating to an existing marriage so it would be possible to apply an earmarking order to a previous marriage that was subject to a pension sharing order. For example, if on the husbands first divorce there was a pension sharing order applied by the court against a final salary pension, then his second wife could apply for an earmarking order against the tax free lump sum at the husbands retirement age.


When will the pension be paid to the former spouse?
There is no specific date for which the pension benefits from an earmarking order must be paid to the former spouse. This is because the scheme member can choose when to retire and take the benefits. For a defined benefit scheme there will be a designated normal pension age (NPA) specified by the scheme but it is possible for the member to defer taking the pension income and tax free lump sum until a later age with agreement from the scheme trustees.

Also, for a money purchase scheme such as a personal pension the member can take the benefits at any time between the ages 50 to 75. This means that the partner can deliberately avoid taking benefits until age 75, when it is a statutory requirement for the scheme member to take a compulsory purchase annuity, therefore deprive the former spouse receiving earlier pension benefits.


Can an earmarking order be varied?
Unlike a pension sharing order where no variation is possible after the decree absolute is granted, an earmarking order can be varied in the future. The former spouse can apply to the court for a variation of settlement order against the members pension rights if circumstances change over time.

This could result in the court deciding to vary the percentage allocation of existing benefits or changing benefits altogether depending on the need for a pension income, tax free lump sum or lump sum death benefits.


How is the value of benefits expressed?
Recent amendments to the MCA 73 by the Welfare Reform and Pensions Act 1999 (WRPA 99) has meant that from 1 December 2000 all earmarking orders must be expressed as a percentage. For example, with a pension income in payment the former spouse will receive a percentage of this payment as specified in the earmarking order.

This would also apply where the courts require a percentage of the tax free lump sum or lump sum death benefits. It may be that the former spouse has come to an agreement through her solicitor as to an amount rather than percentage, nevertheless this amount would be reflected as a percentage in the pension sharing order.


Is expert evidence necessary for earmarking?
For earmarking the court must have information regarding the benefits to the former spouse at retirement age so the cash equivalent transfer value (CETV) showing the value of retirement benefits assuming members are leaving service today, are of little use. This was the view of the court in the case of T v T (1998) where the court determined that earmarking of the CETV Method would have been of no assistance.

As earmarking orders can be varied in the future, it is important for the court, as is shown in the step-by-step guide, to obtain expert evidence today at a cost that can be justified given the complexity, value and significance of the benefits relative to other matrimonial assets. The court may decide that there is no need for actuarial evidence and that projections from the provider or an independent financial adviser (IFA) that is qualified as a pensions expert will be satisfactory in the majority of cases.

Although the CETV from the provider would be used as a basis of the valuation, it is possible to produce a suitably adjusted CETV that reflects the circumstances and specific needs of the parties on divorce.


Are there consequences if the scheme member remarries or dies?
There will be no consequences for the former spouse if the scheme member remarries. However, if the scheme member dies then any benefits due to the former spouse at the normal retirement age will be lost, as the earmarking order will be automatically lapsed by the court. This applies even if the pension income payments to the former spouse have already started after the scheme members retirement.

If the earmarking order is made against the tax free lump sum and this money is actually paid after retirement, then the death of the member will have no consequences and the former spouse can keep this money. If there is an earmarking order against the lump sum death benefits and the member dies prior to retirement, then the former spouse will receive this money.


Are there consequences if the former spouse remarries or dies?
Where there is an earmarking order against a scheme members pension income, tax free lump sum or lump sum death benefits and the former spouse remarries then any benefits due at normal retirement age will be lost. This is because the earmarking order will be automatically lapsed by the court.

As a result the former spouse will be encouraged not to remarry but rather to cohabit in which case under UK legislation she has no rights to ancillary relief as the court only has jurisdiction where the parties are married. The earmarking order will lapse on the death of the former spouse from which time the scheme member will retain the retirement benefits.