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Go by the Brooks in divorce case

I am in the final stages of a divorce. My husband is a director and shareholder in a family business, the other shareholders being his two brothers. His only substantial assets are our home, his shares in the business and a share of the directors&#39 pension scheme.

My solicitor has suggested to my husband&#39s solicitors that I benefit in some way from the scheme but neither side seems certain as to how this can be arranged without falling foul of the courts. What can be done?

As is common in many divorce cases nowadays, a pension scheme forms a very large part of the assets of one or both parties. Therefore, it seems only natural that both sides look to the pension arrangements as a means of balancing the requirements of both parties post-divorce.

Until recently, there was little scope for dividing pension benefits. The best one could achieve was for the scheme member to nominate their former spouse as the recipient of some death benefits.

Some schemes permitted payments to dependants of the scheme member. As long as the former spouse was still financially dependent on the member through the payment of maintenance, the trustees could legitimately pay benefits to them.

However, even then, the trustees would usually have discretion over the recipient of the death benefits and could decide not to act in accordance with the nomination.

In 1994, the ruling in the Brooks case opened up a new avenue. In certain limited circumstances, it became possible for part of a pension fund belonging to one party to be reallocated for the benefit of the other party.

The benefits from the reallocated fund would then be taxed on withdrawal as the other party&#39s own income.

I would need to know far more details of your own circumstances before I could comment on whether or not a Brooks-style approach would apply here. If it did, then it would probably be the most convenient method for you of obtaining an interest in your husband&#39s pension benefits.

The most important point here is whether you were employed by the family business. If not, then the Brooks ruling would be of only limi ted help. However, the ruling does give the courts the power to order that the trustees of the scheme pay death benefits to you.

If you were employed by the family business, this opens up the possibility of a reallocation of funds to you. Before proceeding further, your solicitor would need to brief an actuary well versed in this area, as the maximum allocation requires an actuarial calculation.

The court may need access to a pensions expert before making a decision on this matter, as further options have now been introduced through the earmarking provisions of the Pensions Act 1995.

Briefly, the court can now order that the trustees of a scheme pay a specific percentage of a member&#39s lump sum and/or pension benefits to a former spouse. Although this is a substantial step forward, there are still a number of difficulties here.

First, the member still has control of when the pension commences and could, potentially, defer the pension for longer than would be convenient for his or her ex-spouse.

Second, if the member dies before drawing benefits, the ex-spouse receives nothing although it is possible to earmark a lump-sum death benefit for the ex-spouse.

Third, the pension may fall or even stop on the death of the member, leaving the ex-spouse in a difficult position.

Finally, benefits are taxed as the member&#39s income. Thus, it is possible for an ex-spouse who has no other income to have their share in the pension taxed at 40 per cent.

Overall, earmarking is less satisfying a solution than a Brooks-style reallocation of funds. However, it can be applied to a much wider range of circumstances.

But, by taking an imaginative approach to the apportionment of benefits, it is possible to manufacture greater protection for a former spouse than is obvious at first sight.

Unfortunately, there is little further choice as things stand. There are plans to allow actual splitting of pensions so that a portion of the fund is passed over on divorce but this is unlikely to come into effect before 2000.

Pension-splitting will avoid the problems set out above associated with earmark ing but will be of little use to you now. My feeling is that you and your solicitor sho uld explore the possibility of a Brooks-style reallocation before considering an earmarking approach.


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