The pros and cons of using a Pension Attachment Order or “earmarking” during your divorce

Learn about the pros and cons of using a Pension Attachment Order or "earmarking" to share your pension assets during divorce, to find out if it's right for you.

There are three commonly used methods for dividing pensionable assets during a divorce settlement.

You may have read about two of these, Pension Sharing Orders (PSOs) and pension offsetting,  in recent articles – and if not, it may be worth revisiting those articles to learn more about each option.

Here, you can read about obtaining a Pension Attachment Order (PAO), otherwise known as “earmarking”, which is another pension sharing alternative you might want to consider. This is a type of court order which assigns part or all of an individual’s pension benefits to their ex-spouse or civil partner.

Of course, going through a divorce can be a difficult experience and you may have other seemingly more urgent priorities demanding your attention, such as organising childcare and changing your living arrangements. However, failing to consider a pension sharing arrangement during your divorce could mean that you miss out on an extremely valuable retirement income.

Research published by The Divorce Magazine (16 February 2024), has found that pensions are the second highest value asset in a divorce settlement after the family home. These makes up an average 42% of the household wealth.

So, read on to find out how earmarking works and discover the pros and cons of this method of pension sharing.

How pension earmarking works

Earmarking allows the courts to issue an order stating that some or all of one person’s pension is paid to the other party at the point the pension becomes payable.

The courts will determine who is required to share their pension based on both parties’ existing pension wealth and any other assets to be shared in the divorce settlement.

This only applies to personal or workplace pensions and cannot be used to divide the State Pension.

The pension policy remains in the original owner’s name, but the scheme must pay the ex-spouse or civil partner the amount stipulated by the court when they decide to take their pension benefits. In this way, part of the pension has been “earmarked”, and the pension provider must protect this amount until the member’s benefits become payable.

The court can order one or a combination of the following benefits to be paid to either party:

• All or part of the member’s pension income (this is not an option in Scotland)
• All or part of the member’s tax-free cash sum – this is usually 25% of the total value of the pension, but the most you can usually take tax-free is £268,275 as of the 2024/25 tax year
• All or part of any lump sum paid in the event of the member’s death.

Earmarking is complex, so working with a financial planner who specialises in divorce may be a constructive step to help you understand your options.

The pros and cons of using earmarking to divide pensions during your divorce

As with all pension sharing options, earmarking has both pros and cons.

Pros of earmarking

• You won’t usually pay Income Tax on any earmarked pension benefits — This is because the pension remains the income of the scheme member, who is liable to pay Income Tax on the whole amount.
• Your earmarked benefits could grow over time — If your ex-spouse or partner continues to make contributions to their pension, your portion of the pot could benefit from compound returns until any withdrawals are made.
• Your earmarked benefits are protected if your ex-partner transfers their pension — This could provide invaluable peace of mind that your financial future is secure.
• Death-in-service benefits can also be earmarked — This could entitle you to a lump sum from your ex-spouse or partner’s employer if they die while they’re on the company payroll.

Cons of earmarking

• Earmarking doesn’t provide a clean break — You may need to keep in touch with your ex-spouse or partner for many years after your separation is finalised, as you won’t receive your benefits until they decide to take pension benefits. As of the 2024/25 tax year, the earliest an individual can withdraw from their personal or workplace pension is age 55, rising to 57 in April 2028.
• There may be uncertainty about your eventual payment — If you remarry or your ex-partner passes away, the PAO may no longer apply.
• You won’t receive any payments until your ex-partner decides to take benefits — This may be particularly limiting if your ex-spouse or partner is considerably younger or more affluent than you, as they may choose to take their pension much later in your life.
• You have little control over how the pension is managed or how much you receive — As your ex-partner remains the named owner of the pension, they can decide how much to contribute and where to invest the funds, which could affect how much you eventually receive.

Of course, the relative pros and cons will depend on whether your pension benefits are redirected to your ex-partner or vice versa.

Equally, how a PAO affects your long-term financial plan will be unique to your circumstances and aspirations.

Get in touch to learn more about your pension sharing options upon divorce

As an experienced financial planner who specialises in supporting divorcing clients, I can help you explore and understand the different options for pension sharing during your divorce.

Together, we can review and amend your financial plan to ensure that it aligns with your new situation and your long-term goals.

If you’d like to find out more about how working together may benefit you, please email lottie@truefinancialdesign.co.uk or call 07824 554288.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.  

Workplace pensions are regulated by The Pension Regulator.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.