I was recently consulted by an old school friend, Fiona, whom I had last seen in 1979. Another successful product of state education, Fiona is these days a prosperous businesswoman.
She wanted help obtaining the earmarked pension entitlement she had been granted when divorced in 2001, her ex-husband having attained age 55. Pension-sharing orders had become available from December 2000 but for some reason her solicitor had not consulted an IFA nor advised her of that option. Had he done so, Fiona might be in a better position than is the case.
Around £140,000 is involved and Fiona wants the funds under her control, the earmarking order having granted her a 100 per cent interest. She was therefore shocked to hear that earmarking has in effect given her ex-spouse an extraordinary degree of control over her life.
Most earmarking orders have been granted to women for a share of their ex-husband’s pension. Earmarking requires part of the member’s retirement benefits to be paid to their former spouse or civil partner. It was made available to couples divorcing in England and Wales from 1 July 1996 (19 August 1996 in Scotland) for payments starting after 5 April 1997. State pension benefits cannot be earmarked and neither can dependants’ pensions. In Scotland, only the lump sum can be earmarked, not the pension itself.
The problem is that the earmarked benefits still belong to the member. He can virtually control when any pension payments start and they are taxed at his tax rate. That can mean a divorced wife living on benefits receives income net of higher-rate tax if her former husband is a high earner. He even keeps control of the investment mix and when his ex-wife gets her pension.
Apparently, it is not unknown for more bitter ex-husbands to deliberately switch policies to rack up charges and/or keep the funds invested in cash to destroy their value. Whereas pension payments to the ex-wife stop on the member’s death, if the ex-wife dies first the full pension reverts to her ex-husband. And she loses her earmarked pension if she remarries or her ex-spouse dies. Heads the ex-husband wins, tails the ex-wife loses.
Earmarking seems to have been dreamed up by a misogynist who knew the point had been reached where the law had to be changed to give divorced women some pension rights but who was determined it should be the absolute minimum and even that with strings attached.
It seems scarcely credible that such a cruel and one-sided Act was passed as recently as 1996. In this day and age, how can we as a society tolerate a system that so blatantly leaves a divorced wife at the mercy of and vulnerable to the whims of her former husband?
And it gets worse. While the industry applauded the abolition of the requirement to buy an annuity, the implication seems now to be that a member can keep his ex-spouse in limbo forever should he so wish.
George Osborne has just given pensions a much-needed shake-up. The Finance Bill 2014 should be amended immediately to facilitate the easy and low-cost conversion of earmarking orders into pension-sharing orders.
This deserves the support of the financial services industry and all political parties. I am writing to my MP and I urge you to do likewise.
Neil Liversidge is managing director of West Riding Personal Financial Solutions