The earmarking option for dealing with pension assets on divorce was introduced by The Pensions Act 1995.

Under the terms of an earmarking order, the future pension benefits of the pension holder are ‘earmarked’ for payment to the ex-spouse.

This option has an advantage over the offset option previously described, as it does ensure that the ex-spouse has some financial security in retirement.

There are also a number of disadvantages associated with this option that need to be carefully considered.

Disadvantages of earmarking

The pension benefits are still owned by the original pension owner. Although benefits are earmarked for payment to the ex-spouse, the actual ownership of pension assets are not transferred.

As a result, earmarking might not give you the same degree of confidence and security as the physical transfer of ownership associated with other options.

If the pension holder was to die before taking retirement benefits, no pension benefits would be payable to the ex-spouse. The impact of death might also be a major disadvantage should it occur at any time during retirement before the death of the ex-spouse, as pension benefits would also cease at that time.

In addition to ownership, control over the investment strategy for the pension assets remains in the hands of original pension owner. As a result, an unscrupulous individual could select investments with the aim of purposefully eroding the value of pension benefits whilst building another retirement fund for their own benefit elsewhere.

Control over the timing of benefits remains with the original pension owner. This means that the exposuse will have to wait for the original pension owner to take their benefits before the earmarked benefits are paid.

With recent pension proposals removing the age 75 rule for the purchase of a pension annuity, an ex-spouse could potentially have to wait indefinitely to receive their pension benefits.