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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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The taxation of pension income: Pension paid to former spouse or civil partner

As part of a financial settlement on divorce or dissolution the courts can make:

  • an Attachment Order, or
  • a Pension Sharing Order

in respect of the pension rights of either of the parties.

You need to be aware of the statutory provisions that govern the financial settlement between former partners in order to establish who is to be charged on a pension.

Attachment Orders: Pensions Act 1995

An Attachment Order effectively earmarks a portion of the income or the lump sum or death benefit of a pension (or a combination), without transferring any rights of ownership to the ex-spouse or ex-partner.

A percentage of the pension, lump sum or death benefit is paid to the ex-spouse or ex-partner either immediately (if the pension is already being paid) or from a date in the future when the pension is drawn (for example at normal retirement age).

In England, Wales and Northern Ireland these payments can be made from pension income, lump sum or death benefit.

In Scotland they can only be made from the pension commencement lump sum.

Taxation of Attachment Orders

The pension remains the income of the scheme member and:

  • he or she is chargeable to income tax on the whole amount and
  • no deduction is available for the amount paid under the attachment order.

The pension received by the non-scheme member’s ex-spouse or ex-partner is tax-free in his or her hands. An attachment order may also be referred to as an earmarking order.

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Pension sharing: Welfare Reform and Pensions Act 1999

The law changed in 2000 to allow the pension rights of an employee to be shared with the ex- spouse as an alternative to an Attachment Order (or earmarking order). Under the new provisions, some or all of the employee’s benefit rights are passed over to the ex-spouse or ex-partner. This allows the ex-spouse or ex-partner to receive benefits in his or her own name.

The pension sharing provisions can be applied in divorce proceedings that commence on or after 1 December 2000. Pension rights can be shared under all types of pension arrangements. The Court will actually make an order stating how much of an employee’s pension benefits must be shared with the ex-spouse or ex-partner, although in some cases, in particular Court orders under Scottish law, the pension sharing will be set out in a legally recognised “qualifying agreement” between the parties.

Taxation of pension sharing arrangements

Under these provisions, the ex-spouse will be entitled to receive a pension, which will be taxable in his or her hands.