IF YOU READ NOTHING ELSE, READ THIS…
- Many pension schemes will have discretion to pay a pensions benefit to an employee’s partner if they are financially dependent or financially interdependent with them.
- A joint annuity can be applied to civil partnerships, same-sex and opposite-sex marriages, and co-habiting couples.
- There must be no distinction between same sex and opposite sex partnerships for the treatment of benefits built up after 5 December 2005. A pension scheme has discretion over how to treat benefits built up before this date.
Defined contribution (DC) pension schemes offer flexibility with regard to the beneficiaries of a member’s benefits. Faith Dickson, a partner at law firm Sackers, says: “In a DC environment, as long as someone is financially dependent on [a member], they can normally decide that they can have a pension on [that member’s] death.”
Similarly, when an employee decides to buy an annuity, they can nominate the benefit they want, and select a single life or joint life policy. A joint-life policy can be applied to civil partnerships, same-sex and opposite-sex marriages, and can cover co-habiting couples.
David Brooks, technical consultant at Broadstone, says: “If the annuity was bought in the name of an individual, they may have to nominate a person or demonstrate at the time of death that they are financially dependent; it depends on the insurance company.”
Buying an annuity
Dickson adds: “If [an employee] is buying an annuity and wants to provide for their partner on their death, whether they are married, in a civil partnership or living together, as long as there is enough evidence of some sort of financial dependence, that is enough. There is a great deal of flexibility in DC schemes.”
However, it can be more difficult to determine the beneficiaries of benefits in defined benefit (DB) pension arrangements. David Brown, director in the pensions practice at accountancy firm Deloitte, says: “Many schemes, in terms of same-sex marriages for example, have gone with what is in their legacy documentation. Entitlement is as in the governing document.
“In the DC world, we have member choice, so whereas the inflexible documents that employers operated for legacy DB schemes may have stopped a certain benefit being provided for categories such as same-sex marriage and couples living together, [DC schemes] have the flexibility to provide that.”
Civil Partnership Act
Change came in the form of the Civil Partnership Act 2004, which requires a pension scheme to provide certain benefits to civil partners.But there was a caveat, says Dickson. “In a civil partnership, schemes don’t have to provide benefits under UK law going back to service earlier than December 2005,” he says. “So [employers] can be a bit more restrictive about the benefits they provide. They don’t have to provide a full pension to a civil partner.”
This caveat was challenged in a court case, Walker vs Innospec and others, in November 2012 (see box below), but although the government has said that, as regards most benefits, people are entitled to the same in same-sex marriages as they would be in opposite-sex marriages, it seems to be carving out pensions, Dickson says.
“It seems to be saying [employers] can provide a less generous pension for same-sex marriages,” she says. “I think there is pressure on the government to be more flexible on that.”
Nominated individuals
In the meantime, there are ways in which employees can ensure their pension benefits are left to a nominated individual. For example, some schemes have a nomination form that allows employees to name this individual while they are alive. They may have to provide evidence that they live together, and declare that they are free to marry and are not married to anyone else, as part of this process.
But Broadstone’s Brooks warns that for a married, but separated, employee who is living with, and is financially interdependent with, someone else but doesn’t have the nomination form, the rules state that there are benefits that can only be paid to the spouse.
“Things like contracting out benefits can only be paid to the wife [or husband]. Other benefits, which aren’t in the contracting-out, can be paid to the co-habiting partner. It can be hard for trustees to deal with,” says Brooks.
Co-habiting couples
Co-habiting couples who are not married will find there is little protection, says Sackers’ Dickson. “The view has always been that it’s a benefit available to a married couple, so they could get married or go into a civil partnership,” she says. “They either make that legal commitment and then benefit from it on their partner’s death, or make the choice that they aren’t necessarily worried about getting those benefits. The law doesn’t specifically protect people if they are living together.”
Ultimately, the extent to which it can be proved an individual is financially dependent on an employee will help determine whether they are eligible to receive a pension benefit.
Dickson adds: “Quite a lot of pension schemes will have discretion to pay a benefit to somebody’s partner if they are financially dependent or financially interdependent with them. So there might be a discretion to pay it, but there won’t necessarily be a legal right.”
VIEWPOINT: Tribunal ruling could lead to more civil partner pension claims
Under UK law, civil partners must be treated in the same way as spouses after the death of a scheme member, but this is only in respect of non-contracted-out pensionable service completed after 5 December 2005, when the Civil Partnership Act 2004 came into force.
But a recent employment tribunal case, Walker vs Innospec and others in November 2012, has called into question the UK’s implementation of European equality legislation in relation to pension rights for civil partners and challenges this orthodoxy.
Walker had been a member of the Innospec company pension scheme since his employment began with Innospec in 1980.
In 2006, he entered into a civil partnership with his long-term partner. Walker, who has since retired, brought a claim against his scheme providers Innospec, claiming that its refusal to pay his civil partner for his pre-2005 service was discriminatory.
The figures were alarming: the value of the spouse’s pension that would have been payable to Walker’s partner in the event of his death was about £500 a year. This compared with an estimated £41,000 a year based on his full period of pensionable service: the amount that would have been paid had Walker had a spouse.
Unexpectedly, the tribunal found in Walker’s favour, ruling that UK law should be interpreted compatibly with the European Directive to prevent Innospec from relying on this cut-off date.
Innospec has sought leave to appeal. This case will be one to watch: if it remains the position, it could open up the possibility of an abundance of claims from civil partners against their pension providers.
Michael M Jones is a partner at Charles Russell
Key pension rights for civil partners and married couples on divorce, nullity of marriage or dissolution of a registered civil partnership
The following rights apply to married couples on divorce or nullity of marriage and same-sex couples on the end of a registered civil partnership. They do not apply to couples living together.
- A court can make a pension sharing order against any type of pension apart from the basic state pension or, if it is the only benefit in the scheme, equivalent pension benefit. This includes the additional state pension. In Scotland, only the pension benefits built up during the period of marriage can be shared. With pension sharing, part of the pension is taken away and transferred into a pension pot for the ex-spouse or ex-civil partner.
- A court can earmark the member’s tax-free cash lump-sum or part of their pension to be paid to their ex-spouse or ex-civil partner when it comes into payment. It can also earmark part of the lump sum death benefit to be paid to them to when the member dies. Scottish courts can only earmark tax-free cash lump-sums and lump-sum death benefits.
- Pension sharing orders are preferred; with earmarking orders, if the member dies before retiring, the ex-spouse or ex-civil partner may get nothing.
- The split does not have to be 50:50. A court order must be obtained in order to split a pension, and this will specify the percentage.
- The pension does not have to be split at all, if the divorcing couple agree to divide their assets in a manner that does not involve the pension.
- A person can use their ex-partner’s national insurance record instead of their own if this produces a higher basic state pension. This right is lost on remarriage. Proposed new pension legislation, which may be effective from April 2016, will remove this right.
Source: The Pensions Advisory Service
