Pensions and Divorce – the Highlights!
Did you know that after the family home, a pension is often the most valuable asset a separating couple have? The Family Law Act 1995 and the Family Law (Divorce) Act 1996 were introduced to enable courts to share out pension rights between separating and divorcing couples. Regardless of how amicable a separation, pension rights can only be shared out with a Court Order. The system for dividing up pension benefits can sometimes be seen as complicated and so some couples reach a solution where the pension is left alone and they change the way other assets are shared out. A spouse, a civil partner or a qualified cohabitant (subject to meeting certain conditions) can apply for a Pension Adjustment Order “PAO” at the end of a relationship. For the purposes of this article, I will refer to spouse but the information also applies to civil partners and qualified cohabitants.
At the outset, each spouse is required to give particulars of his/her property and income to the other spouse and this information will include full detail in relation to a member’s benefit under a pension scheme.
After consideration of this information, the Court may serve an order (known as a pension adjustment order or PAO) on the Trustees of the pension scheme of which either spouse is a member. This PAO can require the Trustees to pay a portion of the pension benefits to the other spouse or for the benefit of a dependent member of the family. The PAO requires that the Trustees pay a specified part of the retirement benefits or contingent benefits to the person(s) named in the order. PAOs may be made in respect of the following pension arrangements:
• Occupational Pension Schemes – both in relation to retirement benefits and any contingent benefits (i.e., benefits payable on death in service). Also, this can be in relation to a current pension scheme or a pension scheme of which you were formally a member.
• Additional Voluntary Contributions (AVCs)
• Personal Retirement Savings Accounts (PRSAs)
• Retirement Annuity Contracts (RACs) including Trust RACs
• Buy out Bonds/Personal Retirement Bonds
A point to note is that a separate PAO is required for each separate pension arrangement that you have benefits with. Also, benefits payable under the Social Welfare Acts and disability benefits arising under an Income Protection policy are not pension benefits in the context of the legislation.
Following the making of the PAO, the pension scheme Trustees will notify the person in whose favour the order is made of the amount and nature of the retirement benefits and/or contingent benefits which have been designated under the order.
So, how are these benefits calculated? Firstly, the court will rule on two key factors which will determine the amount. These are the “relevant period” and the “relevant percentage”. The relevant period may be the period of marriage but not necessarily so. It cannot be later than the date of granting the decree of judicial separation or divorce. This means future benefits cannot be shared.
This information will also include the option of a transfer value that may be available in lieu of keeping the benefit under the existing pension scheme. An example of a PAO is:
“(a) the period of reckonable service over which the designated benefit is deemed to have accrued is the period commencing on 1st January 2005 and ending on 1st January 2015 and
(b) the relevant percentage of the Retirement Benefits accrued over the Designated Period and to be paid to the Beneficiary is 50%”
In the example shown, the spouse who is not a member of the pension scheme, will get 50% of the benefit that the member earned in the 10 year period shown. The formula for calculating the benefit due will differ depending on whether the pension scheme is defined benefit or defined contribution. In either case, the spouse that has been awarded the PAO will be offered a transfer value. They may also be given the option of establishing an independent benefit within the member’s pension scheme.
Some points to make around this are:
• The Court will not make a PAO if the spouse who applies for it has remarried.
• If a PAO in relation to retirement benefits is made, this will be unaffected by a subsequent change in marital status of either spouse.
• A PAO in relation to contingent benefits (benefits payable on death in service) cease to have effect if the spouse who is not a member remarries.
If the member spouse retires and the spouse who benefited from a PAO has not transferred their benefit to another pension arrangement or has not established an independent benefit, then when the member spouse retires, the non-member spouse must also retire. A PAO will also have to be taken into consideration at retirement in relation to Standard Fund Thresholds and Tax Free Lump Sum payments.
Standard Fund Thresholds – When calculating a member’s threshold limit (currently €2 million), the member’s entitlement is calculated as the total value they would have got if a PAO was never made. If this calculation puts the member over the Threshold, the chargeable excess tax liability is split between the member and the non-member spouse on a pro-rata basis.
Tax free lump sum – subject to Revenue regulations, there are formulas for calculating the lump payable to a member on retirement and currently up to €200,000 of this lump sum can be paid tax free. Where a PAO exists, there is a separate €200,000 limit for the member spouse and the non-member spouse.
The above is just a brief outline of some of the issues around PAOs and as you can see, it can be a complex area and every situation is different. It is important that all parties involved are fully aware of all the issues and detailed further information is available from the Pensions Authority on their website where they have a 42 page “brief” guide to the pension provisions of the Family Law Acts. In the event of an imminent separation or divorce, it is imperative that in addition to legal advice, you should also see independent financial advice.