No marriage equality for pensions (Part 1)
The result of the marriage equality referendum added to Ireland’s reputation as a country concerned with securing basic rights for the family unit in all its forms. 20 years after the divorce referendum however, the State still sanctions discrimination against divorced couples in the area of pensions.
HOW IT WORKS
Couples who separate or divorce typically have their matrimonial assets split by way of a court order. As an example, the future ownership of the family home may be settled under a Property Adjustment Order.
In a similar fashion, pensions may be split by way of a Pension Adjustment Order re-allocating pension benefits between the parties. This means that a spouse who is not a member can acquire rights to a pension which during the marriage was built up by the other spouse.
HOW IT DOESN’T WORK
It seems natural to us in a case where the family home has been transferred to one of the spouses following separation or divorce, that the Revenue should recognise that spouse as the rightful owner. This is indeed the case: that owner can now avail of the various tax reliefs relating to the family home and that owner is now liable for the local property tax.
While such an approach may seem natural, Revenue does not recognise separation or divorce in relation to pension schemes. In the area of tax relief on pension contributions the Law completely disregards the fact that some or all of the pension may belong to the estranged spouse This can have devastating consequences for the divorcee who wants to make provisions for a new family:
CASE STUDY
Joe is 60 and member of a defined benefit pension established by his employer. Joe has been making regular pension contributions and his fund is worth €800,000 which is the maximum benefit he is allowed under Revenue’s funding rules. At current annuity rates this will give an annual pension of €28,000 on retirement.
Joe and his wife, Jane, have recently divorced. As part of the divorce settlement a Pension Adjustment Order granted 100% of the value of the fund to Jane.
As Revenue doesn’t recognise the divorce, Jane’s benefit is regarded as still being part of Joe’s fund. Thus Joe cannot make any further provision for himself as he was already at the maximum limit before the Order was granted.
The inequity in this becomes clear if you assume both Joe and Jane remarry and, as the sole breadwinners in their new families, they wish to make provision in their pension funds for their new spouses.
Although Jane has a pension benefit worth €800k this does not negatively impact on her ability to build up a new fund. Joe on the other hand has no further pension funding available. He is not entitled to fund for a pension for his new family.
The Pensions Authority have produced a user-friendly free Guide to the Pension Provisions of the Family Law Acts (pdf). This booklet contains information on pension adjustment orders, dependants retirement benefits, what happens if the dependent spouse remarries, etc. If you would like further information on this topic please contact Tommy Nielsen by emailing tommy.nielsen@independent-trustee.com.
*Please note this content is the view of the author and not of Independent Trustee Company