Annuity share after Divorce - advice needed pls

linclass

Hi

My ex divorced me in November. There is a pension sharing order, on an annuity pension that I'm in receipt of now (I'm still working). The Divorce states my ex will receive HALF of what I receive each month. What I find very ambiguous is, I receive the whole amount payable each month AFTER Tax, and I pay her half of the WHOLE amount direct into her bank account. I have therefore been paying the ex half of the WHOLE amount before tax. As an example, pre tax, I'll use the figure of £200 each month - £100 each before tax, but only £80 each after tax is deducted. Should I in fact be paying her half of the TAXED amount each month? Those Divorce papers state *the Ex will receive HALF of what I RECEIVE* - I only ever receive the money after Tax. It isn't a Spousal Maintenance order. The agreement was she to receive 50% of what I GET - it didn't stipulate what I get BEFORE tax. There is also the rule that it's only payable until she reaches the age of 65 (she wanted 67), re marries or dies. There can be no changes made to this order whatsoever, apart from any yearly increase that may occur. The amount is paid by me every month, along with child maintenance.


Advice gratefully received.

kidmugsy

Won't you be able to claim back the tax you've paid on the money you've given her? Anyway, why not ask the lawyer who acted for you on the divorce?

linclass

I don't think I can, no. I'm on PAYE. As for the Lawyer, I've done nothing but pay out money this past 2 years ... nothing left!! Thanks for responding,

kidmugsy

linclass wrote: »

I don't think I can, no. I'm on PAYE.

Phone or write to HMRC, explaining the position and asking for a new tax code.

TH1878

linclass wrote: »

Hi

My ex divorced me in November. There is a pension sharing order, on an annuity pension that I'm in receipt of now (I'm still working). The Divorce states my ex will receive HALF of what I receive each month. What I find very ambiguous is, I receive the whole amount payable each month AFTER Tax, and I pay her half of the WHOLE amount direct into her bank account. I have therefore been paying the ex half of the WHOLE amount before tax. As an example, pre tax, I'll use the figure of £200 each month - £100 each before tax, but only £80 each after tax is deducted. Should I in fact be paying her half of the TAXED amount each month? Those Divorce papers state *the Ex will receive HALF of what I RECEIVE* - I only ever receive the money after Tax. It isn't a Spousal Maintenance order. The agreement was she to receive 50% of what I GET - it didn't stipulate what I get BEFORE tax. There is also the rule that it's only payable until she reaches the age of 65 (she wanted 67), re marries or dies. There can be no changes made to this order whatsoever, apart from any yearly increase that may occur. The amount is paid by me every month, along with child maintenance.


Advice gratefully received.

You need to check this with the solicitor but, digging deep into my old pensions knowledge, I seem to recall that this is one of the unfair things about earmarking / attachment orders.

The income is yours so you are taxed accordingly but I think your spouse is entitled to 50% of the gross pension, tax free. I also don't think you can reclaim the tax.

The main reason for it being gross is that it's easily identifiable and doesn't depend upon your tax code.

As I say though, speak to the solicitor...

PensionTech

Phone or write to HMRC, explaining the position and asking for a new tax code.

You won't get far with this. One of the few clear things about this situation is that the income is all deemed to be yours and you are therefore taxed on the whole amount. This would be the same even if responsibility for paying the earmarked amount had been given to the pension scheme rather than you; they would have to tax it all under your code and then work out how much to pay to your spouse after that.

However, that is not to say that the amount your ex receives should necessarily be based on a percentage of the gross pension.

I think it actually depends on the way that the order is drafted. The percentage that you pay your ex-spouse could be out of your gross or net income depending on what the order specifies. British Airways Pensions has published some guidance on what should be taken into account when drawing up an attachment order to be applied to their scheme, which seems to back up the idea that it could be either/or:

The instructions in the Order will need to be considered to ensure that they fit within the scope of the Scheme rules and also that other relevant considerations such as statutory deductions from pension, such as income tax, can be accommodated. When drawing up the Order it is important that the maximum payment to a former spouse or civil partner does not exceed the member’s remaining pension after the deduction of income tax. As tax deductions can fluctuate, if the percentage quoted is of the net pension, the amount payable to the former spouse or civil partner will also fluctuate. We normally find it more appropriate if the percentage to be “attached” is therefore assessed as a portion of the member’s gross pension so that the amount can be more clearly identified.

If your attachment order is silent on whether it should be paid out of gross or net pay, then quite frankly it should have been drafted better and this should be brought up with your solicitor - but the few bits I've found online seem to favour the default position as being that the percentage you pay her is from your net pension (and, like you, I think this is a more natural interpretation of "half of what you receive", but there is some room for doubt there):

Aviva

... When a pension earmarking order applies, the pension paid to the ex-spouse will be taxed at the rate(s) appropriate to the member.

(effectively says that the spouse's benefit is paid net of tax - i.e. out of the net benefit.)

Actuaries for Lawyers

... If for example a 40% attachment order was made to a member’s pension and at retirement their pension was £12,000 per annum or £1,000 per month, HMRC would normally pay to the member the net amount of £1,000 per month. If for example based on the member’s tax code the rate of tax deducted was 10%, the net of tax payment to the member would normally be £1,000 x (1 – 0.10) = £900. Given a 40% attachment order had been made on this pension the scheme would pay 40% x £900 = £360 per month to the ex-spouse and (100% less 40% 60% x £900 = £540 per month to the member. As far as the ex-spouse is concerned, the payment of £360 is not taxable as income to her by HMRC as it is deemed that tax has already been paid on this amount.

I'm trying to find something conclusive in the legislation but all I have is this: "The order must express the amount of any payment required to be made by virtue of subsection (4) above as a percentage of the payment which becomes due to the party with pension rights." This could arguably refer to either the pre- or post-tax income, which I suppose is why it is meant to be included in the earmarking order itself.

Finally, where the wording lets you down, you could consider the common-sense aspect of it all; attachment orders are intended to compensate the ex-spouse for the loss of access to income that they would have had access to if they had remained married. Your spouse would have had access to your post-tax pension, not your pre-tax pension. The fact that they have given her 50% of your pension indicates to me that this was not a complex balancing act where some things were offset against other things and they wanted her to receive a specific amount of your pension in order to balance the scales; it seems more like just a basic cut down the middle so that she gets half of what would have otherwise been available to both of you. That, again, would lead me to suspect that 50% of your post-tax income is what was intended in making this ruling.

You should still raise it with your solicitor, as making an individual decision based on some stuff you read on a forum is unlikely to give you much legal protection if she decides to complain that you're not following the rules of the order. The above just gives my opinion of the way I would expect it to go - and the way I think it should logically go (you may want to discuss these points with the solicitor if it seems like they aren't sure of the position).

I'm baffled by why an earmarking order was used at all - they are all but obsolete, as they are so deeply flawed that pension sharing orders are favoured in almost all cases these days. This does not, to be honest, give me great confidence in the pensions knowledge of the legal advisers used by you and your wife.

EDIT:

Ah - I've found something in Aries. (Aries is a subscription-only database of pensions legislation and guidance used by pension professionals. I dislike it because the guidance doesn't always reference its sources, as it doesn't in this case, making it hard to back up what it says, and I have certainly found many errors in it before. For that reason I would take the following with a slight pinch of salt - but not too much, as it is written quite definitively, and the vast majority of Aries is accurate.)

[Divorcing parties and their advisers should consider] Whether the earmarking percentage to be allocated to the ex-spouse / ex-civil partner should be a percentage of the net benefit after tax (or for practical purposes, net of basic rate tax deducted via PAYE).

If the order does not make this specification, the earmarking percentage will apply to the gross benefits, but the member will still be liable for the whole of the tax payable.

E.g. if an order just states that 50% of the pension is to be earmarked, then that gross value must be paid to the ex-spouse / ex-civil partner. If the member is a higher-rate taxpayer, he will be left with 10% only of the gross pension. Cases of this nature have come to light, necessitating a return to court to redress the position.