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7th October 2024
Pension Adjustment Orders are things that none of us probably anticipate we need to know about, until we do. This week I will share the following, in the hope that it might help you or a loved-one;
In Ireland, Pension Adjustment Orders (PAOs) are legal instruments used to divide pension benefits between spouses or civil partners following a judicial separation, divorce, dissolution of a civil partnership, or the end of a long-term relationship.
The distribution of pension rights is often a crucial aspect of such settlements, given the significant value these benefits hold for long-term financial security, especially in retirement. And give that divorce or separation is already a challenging enough journey, having clarity and fairness around future financial wellbeing is obviously a huge deal.
According to the CSO, Ireland had the second lowest divorce rate in the EU in 2020, at 0.6 divorces per 1,000 persons, below the EU27 average of 1.6 divorces per 1,000 persons. Interestingly, the highest divorce rates within the EU were reported in Latvia (2.9 divorces per 1000 persons), Lithuania (2.6) and Sweden (2.1).
A Pension Adjustment Order is a court order made under the *Family Law Acts* in Ireland. It directs how pension benefits should be divided between the original holder of the pension scheme (the “member”) and their spouse or civil partner (the “non-member”) following the end of their relationship.
The objective is to ensure that the non-member receives a fair share of the pension entitlements accumulated during the marriage or civil partnership.
Retirement Benefits – These are benefits paid to the pension scheme member upon retirement, typically in the form of a pension income or lump sum.
Contingent Benefits – These are benefits payable to the member’s beneficiaries upon death, such as death-in-service lump sum pay-out.
PAOs can be made in respect of any form of pension scheme.
Relevant Period
The “relevant period” is the specific timeframe during which the member’s pension contributions that are to be divided were made. This is typically defined in relation to the duration of the marriage or civil partnership.
For example, if a couple was married for 20 years but the pension contributions spanned 30 years, the relevant period may be confined to the 20 years of marriage. So the funding the member did before marriage is deemed off-limits.
Defining the relevant period ensures that only the pension contributions made during the relationship are included in the calculation, safeguarding any pre or post relationship pension funding from being divided, unless otherwise agreed by the parties.
Relevant Percentage
The “relevant percentage” determines how much of the pension benefit accrued during the relevant period will be transferred to the non-member. This percentage is usually determined based on the court’s assessment of various factors, including the financial situation of both parties, their future needs, and any other assets that have been divided as part of the separation or divorce process.
For instance, if a court decides that 50% of the pension contributions during the relevant period should go to the non-member, then the PAO will stipulate that the non-member is entitled to half of the pension accumulated during that time frame. Importantly, this percentage applies only to the benefits earned within the relevant period, not to the entire value of the pension. There is a bit of figuring-out to be done, as you can tell!
A Contingent Benefits Order, while related to a PAO, deals specifically with the division of contingent benefits, which arise in the event of the death of the member before they retire. These benefits might include a lump-sum death-in-service payment.
Whereas a PAO deals with retirement benefits, a Contingent Benefits Order ensures that the non-member spouse or civil partner retains a share of any benefits that may be payable on the member’s death, even if the marriage or partnership has ended. It is a crucial element for individuals who want to ensure that they or their children remain financially protected after the dissolution of the relationship.
A Contingent Benefits Order can operate independently of a PAO or in conjunction with one. In other words, a person can receive a share of both retirement benefits under a PAO and contingent benefits through a separate court order, or they may be limited to just one, depending on the circumstances.
While both a PAO and a Contingent Benefits Order divide pension entitlements between former spouses or civil partners, they differ in their application:
Scope of Application
Timing
Coverage
Independence
A PAO can be applied without a Contingent Benefits Order and vice versa, depending on the circumstances of the case and the preferences of those involved. For example, a person may only be interested in securing retirement benefits and may not seek a share of death-in-service benefits.
To obtain either a PAO or a Contingent Benefits Order, an application must be made to the Irish courts, typically as part of judicial separation, divorce, or dissolution. It is advised that any such application is made before finalising the divorce or dissolution.
However, a PAO on retirement benefits can be made after divorce or dissolution if the pension has yet to be drawn down.
When it comes to a PAO on contingent benefits the timeframe to make an application to the court is limited to a max of one year post divorce or legal separation.
The court will consider a wide range of factors when determining the specifics of the order, including:
– The financial position and future needs of both parties
– The length of the marriage or civil partnership
– The contributions made by each spouse or partner to the marriage, both financially and otherwise
– The welfare of any dependent children
Once the PAO or Contingent Benefits Order is made, it must be communicated to the pension scheme trustees, who are then legally obligated to administer the pension in accordance with the order. It is additional obligations on the Trustees that they probably would rather not have to, but they are obliged!
Transfer
If the ‘non-member’ does not transfer out their portion, the Trustees are required to pay pension benefits to them from their portion as outlined in the PAO.
However, the ’non-member’ will not have control of the funds the pension is invested in and this may not align with their choice and tolerance for risk. This could be a massive issue, depending on the decisions that the member makes around investment, fees and performance. If they get that wrong, it will impact the non-member negatively.
Once a PAO is granted by the court it is possible for the benefiting spouse/partner to transfer their portion to their own pension scheme. This allows them to invest the funds in a portfolio that they are comfortable with giving them more control. This is often the sensible thing to do, provided there is a clear benefit from fund, fee, performance or access.
Earmarking: involves directing that a portion of the pension member’s future pension benefits be paid to their former spouse or civil partner when the member retires.
This means that the non-member spouse does not receive a separate pension fund but rather a share of the benefits when they eventually become payable. This method ties the non-member’s payments to the member’s retirement and decisions regarding the pension.
Pension splitting: (often preferred for greater financial independence/control) involves dividing the pension fund itself at the time of separation or divorce. Under this approach, a percentage of the pension is transferred into a separate fund for the benefit of the non-member spouse, who can then manage or access it independently, subject to pension scheme rules. Pension splitting usually provides more control and financial confidence for the non-member, as they are no longer reliant on the pension member’s retirement decisions.
When the court decides that no portion of the pension benefits will be transferred to the non-member spouse or civil partner a nil POA is granted. This can happen if the pension is deemed insignificant or if the division of other assets during the separation or divorce adequately compensates the non-member spouse.
In such cases, while the PAO still legally recognises the existence of the pension, it effectively allocates no share of the pension benefits to the non-member, hence the term “nil pension.”
It can also apply when there is more than one pension fund involved. The court may grant a portion of one fund to the ‘non-member’ but not the other. A nil POA will be granted on the other fund, which means that the ‘non-member’ will therefore not be allowed to receive benefits from that fund.
Final Thoughts
Pension Adjustment Orders and Contingent Benefits Orders are vital tools for ensuring a fair distribution of pension entitlements in the event of separation or divorce. While PAOs focus on retirement benefits, Contingent Benefits Orders provide protection in the event of the pension member’s death before retirement. Understanding the distinctions between these orders and the concepts of the relevant period and relevant percentage is essential for anyone navigating this aspect of the financial complexities of a relationship breakdown.
Because pension rights can be one of the most valuable assets in a separation, it is advisable for individuals in such situations to seek expert legal and financial advice to ensure their interests are adequately protected. Citizens Information is a great source of information, PAO section here.
I hope it helps.
Paddy.
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Informed Decisions are one of Ireland’s only remaining independent financial advice firms. We specialise in retirement & investment planning for successful individuals, so that our clients only have to retire once.