When can a divorced spouse draw down via pension adjustment order?

[Dr Strangelove]

Assume Johnny (30) and Mary (25) marry. He is five years older, as will become relevant later. Johnny has a job and pays into a DC pension fund. Ten years later he moves job and stops paying into the scheme, and five years after that they divorce.

Mary (now aged 40) received Johnny's (now aged 45) DC pension fund in full as part of the settlement via pension adjustment order.

The conditions of the DC fund are earliest drawdown at age 50 and Mary has financial needs and would like to tap in.

Can Mary drawn down the pension when Johnny turns 50 or does she have to wait another five years until she turns 50 herself?

 

[Clamball]

Interesting question. I have no idea as to the actual answer but just thinking logically. The pension is Johnnys, so the pension trustees would look at the pension holder and say, no you need to wait until Johnny is 50 to draw down the fund. Which would be good for Mary. I am assuming then that the value of the DC pension is transferred into Mary’s name to set up to draw down in her name, but it is here she runs into trouble. She can only drawdown from an arf once she is 50 so she would need to wait 5 more years for any money although the fund is now in her name.

If the judge had made a pension adjustment order on a DB pension between Johnny and Mary, and Mary started to get a monthly payment from it once Johnny reached his company’s retirement age. What happens if Johnny dies say at 66 after he reached pension age at 65. What happens then? Does the pension die with him or would Mary still get the pension paid to her until she died?

 

[TomEdison]

From memory, the way pension adjustment orders work is this:

If you're the beniciary of a pension adjustment order, awarding you X% of someone's pension entitlements, you can simply sit around and wait for their pension to come into payment, and then collect x% of the payments that would otherwise go to them — x% of the lump sum, x% of each instalment of pension, etc. Payments to you will start when payments to them start, and will stop when payments to them stop. If the other person takes a pension before you reach pension age, you'll still get your payments.

Or, you can take a lump sum transfer into a pension scheme/PRSA/whatever of your own. If you do that, it's treated just like the rest of your retirement savings. When and how your ex takes, or could take, pension benefits will not affect you in any way. The standard rules apply to you with regard to when you can take benefits depending on your age, health, etc.

If you're ever in the situation of being a beneficiary of a pension adjusmtnent order you'll need to take advice on whether, in your circumstances, the optimal choice is to take an immediate transfer to your own fund, wait until just before your ex's benefits begin and then take a transfer, or simply wait for your ex's benefits to come into payment and receive your share of those.

 

[Dr Strangelove]

@Clamball

Yes I follow your logic but it seems strange that a DB scheme could be paid to a younger spouse but not a DC one.

@TomEdison

In my example (perhaps unusual) the PAO is made 100% in favour of Mary, the younger spouse. It would be strange if she had to rely on Johnny’s permission to start drawdown.

By way of context Mary is public servant who may not retire until her 60s. She doesn’t want the pension via PAO to be delayed her own retirement.

 

[TomEdison]

In my example (perhaps unusual) the PAO is made 100% in favour of Mary, the younger spouse. It would be strange if she had to rely on Johnny’s permission to start drawdown.

She doesn't have to.

If she chooses to leave her entitlement in Johnny's pension fund then drawdown depends on when Johnny qualifies for benefits under that fund. Without seeing the rules of the fund we don't know exactly when that will be, but quite possibly Johnny can't qualify for benefits unless he leaves service, and he's hardly going to quit his job for Mary's convenience.

But she has the option of taking a transfer into a fund of her own. Johnny is in a DC fund, which removes the usual objection to taking an immediate transfer. So she can transfer to a fund of her own in which case she can qualify for benefits before age 60 by leaving her own job.

There's no choice she can make that will allow her to take benefits before age 60, while she and Johnny are both still working, if that's what she's hoping to do.

(Even though the PAO awards her a 100% share of Johnny's entitlement, if she leaves the money in Johnny's fund it is still, so far as the administrator's of that fund are concerned, Johnny's entitlement. If she wants to have control over it, she has to transfer it to PRSA or similar in her name.)

 

[Dr Strangelove]

If she chooses to leave her entitlement in Johnny's pension fund then drawdown depends on when Johnny qualifies for benefits under that fund. Without seeing the rules of the fund we don't know exactly when that will be, but quite possibly Johnny can't qualify for benefits unless he leaves service, and he's hardly going to quit his job for Mary's convenience.

Johnny left the job with the fund the PAO relates to before the divorce. He now has another job with another DC pension scheme which Mary has no entitlement to. Assume the rules of the first scheme allow him to draw down from it at 50. My question is whether Mary can do so at 45.

The counterfactual is of course that they stayed married and Johnny decided to draw down at 50, and Mary would have benefitted from this at 45.

 

[Fortune]

In my example (perhaps unusual) the PAO is made 100% in favour of Mary, the younger spouse. It would be strange if she had to rely on Johnny’s permission to start drawdown.

Strange, but that's the way it is. The PAO just grants the benefits to the non-member spouse. It doesn't do anything to the ownership of the pre-retirment pension, which is why there's an option to transfer the benefit out so that it is in the ownership of the non-member spouse.

 

[TomEdison]

It would be strange if she had to rely on Johnny’s permission to start drawdown.

If anything is strange it's that, although Mary has a PAO entitled her to 100% of the value of Johnny's benefits, she doesn't exercise her right to transfer the value to a retirement savings arrangement that she controls. It's her decision not to do that that leaves her dependent on Johnny's circumstances, and Johnny's decisions, so far as the payment of benefits goes.

I get that, if they had remained married, Mary could have started to benefit (indirectly) from Johnny's retirement savings at age 45, dependent on Johnny's decision. She still can. What she can't do is make her own choice to receive benefits from age 45. She never had that right while the marriage continued, and there is no public policy reason why she should have it now.

 

[Dr Strangelove]

Thanks for all the replies folks.

Very little information in the public domain on this topic and it’s immensely useful.