Impact of the new Pension Freedom Regime on Existing Pension Attachment Orders

There are a group of people who issued Divorce Petitions between 1 July 1996 and 1 December 2000 who may be particularly affected by the new Pension Freedoms.

Since 1 December 2000 the majority of people who divide Pensions at the time of Divorce have chosen the Pension Sharing route however anyone issuing a Petition after 1 July 1996 but before1 December 2000 could only apply for a Pension Attachment Order.

Many of the people who obtained Pension Attachment Orders are now reaching retirement age and the new Pension Freedoms are impacting on those Orders.

A significant difference between Pension Attachment Orders and Pension Sharing Orders is that the Pension Fund is not split into two separate Funds.  The Pension Fund therefore remains in the name of the member with the Court Order directing the Pension Trustees on the amount they should pay to both people on the fund member's retirement.

Usually the Attachment Order directed the member of the Pension Fund to commute the maximum lump sum available from the Pension, with the Pension Trustees being required to pay each person a specified percentage/amount.  This could be up to 100% of the maximum commutable lump sum.

Until April 2015 the maximum commutable lump sum was usually 25% i.e. the tax free amount.  However since April 2015 (for the majority of Pension Funds) it is now possible for the whole of the Pension Fund to be commuted into a lump sum although only 25% would be tax free with 75% being taxed at the member's marginal income tax rate. 

Pension Trustees invariably interpret the wording of Court Orders narrowly.  This means that those Attachment Orders that make no reference to a particular percentage i.e. they simply direct that the "maximum lump sum" is to be commuted can mean commutation of 100% of the Pension Fund irrespective of the tax consequences for the Pension member. 

Those Orders that are worded "the maximum commutable tax free lump sum" are better placed and those that refer to commutation of a specific percentage ie "25% of the commutable tax free lump sum" have clearly defined what should happen.  The possibility that the tax free percentage rules could change in the future was the main reason why some Orders did not define the particular percentage.  No one would perhaps have envisaged the impact of the 2015 Pension Freedoms.

In addition to "attaching" the Pension Fund lump sum provision it is also possible to have a Pension Attachment Order applied to the income derived from the Pension Fund.  The Attachment Order can direct the Pension Trustees to pay a specified percentage of the pension income to each person.   If however the member of the Pension Fund has commuted 100% of the Pension Fund and this payment has been made then there will be nothing left to pay any future income payments which could have dire financial consequences for everyone. 

There is one saving grace for people with Pension Attachment Orders - the Order can be varied either by agreement or by further Court Order.

If a Pension Attachment Order forms part of your Financial Settlement on Divorce, you should investigate the precise wording of that Order and consider whether you should make any variation application in advance of any payments being triggered under the Order.  If the Order has already been actioned by the Pension Trustees nothing of the Fund may remain to be varied.

For advice on variation of Pension Attachment Orders please contact Sheridan Ball, Family Team, Rollits LLP, on sheridan.ball@rollits.com or 01482 337361

Posted on: 03/02/2016

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.

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