Pension Adjustment Order, How They Work & What Options You Have
Granting of a Pension Adjustment Order
You may have watched the movie, When Harry met Sally, a lovely rom-com, came out 1989. It will fill your heart with love and romance.
Well this story is about what happens to Harry’s pension when the relationship breaks down. By the way, it could be Sally’s pension either.. you get the picture.
In the event of judicial separation, divorce, dissolution of a civil partnership or ending of a relationship with a qualified co-habitant an application for a pension adjustment order (PAO) may be made to the courts.
A PAO is a court order which awards a portion of the member’s (Harry’s) pension benefits to the non-member spouse (Sally) or for the benefit of a dependent member of the family. A PAO is the only permitted way that pension benefits can be divided.
When a PAO has been granted to the non-member spouse, (Sally) they will have the option to transfer the designated benefit out of the member’s pension and into a pension in their own name.
This information will cover how and when retirement benefits are paid
- Where the non-member spouse (Sally) does not transfer, and the designated benefit remains in the member’s pension (Harry’s pension)
- Where the non-member spouse does transfer out and establishes an independent benefit.
Glossary
Designated Benefit: the amount of the member’s (Harry’s) pension awarded to the non-member spouse (Sally) under the PAO.
Member: the spouse who is the member of the pension scheme/ contract in question. “Harry”
Non-Member Spouse: the spouse who is not a member of the pension scheme/contract and in whose favour the PAO is grated. “Sally”
Pension Adjustment Order (PAO): a court order granting some or all of the member’s pension to their former spouse.
Spouse: in the context of this information spouse will also mean registered civil partner or qualified co-habitant unless otherwise stated. We are going with “Sally”
Sally does not transfer out
If Sally takes no action and leaves the designated benefit in Harry’s pension scheme, then retirement benefits will only start to be paid to her when Harry decides to take retirement benefits.
Sally does not have the option to take retirement benefits independently to Harry.
The retirement options available will depend on the type of pension and for company pension schemes, the rules applying to the scheme.
Retirement Lump Sum
Most pensions will allow for the payment of a retirement lump sum, in which case Sally will have the option to take part of the designated benefit from the Pension Adjustment Order as a retirement lump sum regardless of whether Harry has exercised the option.
For company pension schemes and personal retirement bonds, the salary & service lump sum payable to Sally will be determined by Harry’s salary, service accrued during the relevant period and percentage as stated on the PAO. Harry’s salary and service lump sum are calculated as normal but is reduced by the lump sum potentially payable to Sally.
Where the retirement lump sum is calculated as 25% of the value of the fund, the amount payable to Sally will be 25% of the designated benefit.
Harry’s retirement lump sum will be 25% of the value of the remaining fund (if any).
Where the scheme rules allow for the option of a salary & service lump sum or a 25% lump sum, Sally can make this choice independently of Harry.
Balance of the Fund
Harry’s decision with regards to the balance of the pension fund after the payment of the retirement lump sum will also apply to the balance of Sally’s designated benefit. For example, if Harry opts for an annuity then the balance of the designated benefit must also be used to provide an annuity for Sally.
The annuity payable to Sally in such circumstances will be based on Harry’s life and cease on Harry’s death.
Harry’s Death before Retirement
If Harry dies before retirement benefits are paid, the current value of Sally’s designated benefit becomes payable. This should be paid to Sally within three months of Harry’s death.
Sally’s Death before Retirement
If Sally dies before retirement benefits are paid, the current value of the designated benefit becomes payable to her estate. This should be paid to Sally’s estate within three months of her death.
Sally Establishes an Independent Benefit
If Sally transferred the designated benefit into a pension in her own name, she can take retirement benefits independently of Harry.
However, the earliest date Sally’s benefits become payable will still be based on Harry’s date of birth and his pension type, see table below
| Harry’s Pension type where transfer came from | Type of Pension Sally Transferred into | Earliest Sally can access Retirement Benefits |
|---|---|---|
| Personal Retirement Bond | Personal Retirement Bond | Harry’s 50th Birthday |
| Company Pension Scheme | Personal Retirement Bond | Harry’s 50th Birthday |
| Company Pension Scheme | PRSA | Harry’s 50th Birthday |
| PRSA & Member an Employee | PRSA | Harry’s 50th Birthday |
| PRSA & Member Self Employed | PRSA | Harry’s 60th Birthday |
| Personal Pension | PRSA or Personal Pension | Harry’s 60th Birthday |
Retirement Lump Sum
Personal Retirement Bonds (PRB):
Sally can opt for a salary & service lump sum or a retirement lump sum of 25% of the value of the PRB.
The salary & service lump sum will be determined by Harry’s salary, his service accrued during the relevant period and percentage as stated on the PAO.
PRSAs & Personal Pensions:
The retirement lump sum from PRSAs and personal pensions will be 25% of the value of the plan on the date benefits are paid.
Balance of the Fund
If a salary and service lump sum was taken from a PRB then the balance of the PRB must be used to purchase an annuity. Any element that is confirmed as relating to AVCs can also be transferred to an Approved Retirement Fund or taken as a taxable lump sum*.
Alternatively, where the lump sum was calculated as 25% of the value of the fund the balance of the fund can be used to
- Purchase an Annuity
- Transfer to an Approved Retirement Fund (ARF)*
- Take as a taxable lump sum*
*In order to avail of these options, Sally must have in their own name
- A guaranteed pension income of €12,700 a year, or
- Used €63,500 to purchase an annuity, or
- Invested €63,500 in an Approved Minimum Retirement Fund (AMRF
Taxation Treatment
Retirement Lump Sum
Harry and Sally each have their own €200,000 tax free limit. The retirement lump sum payable to Sally will not reduce Harry’s €200,000 tax free lump sum limit.
| Lump Sum | Income Tax |
|---|---|
| First €200,000 | Exempt |
| Next €300,000 | 20% income tax |
| Balance | Marginal rate income tax, PRSI & USC |
Standard Fund Threshold (SFT) / Personal Fund Threshold (PFT)
Impact on Harry
The amount awarded to Sally under a PAO remains part of Harry’s fund for SFT / PFT purposes. This means that when Harry takes retirement benefits the calculation should be done as if the PAO had not been granted. If Sally’s designated benefit was transferred out by the time Harry takes retirement benefits the amount transferred out is revalued based on the fund growth it would have achieved had it remained in his pension.
If Harry’s pension exceeds the SFT / PFT the tax due on the excess fund is split between him and Sally in the same proportion as their share of the pension fund. Note: the tax calculations for an excess over SFT / PFT with a PAO are complex and will be calculated by the administrators involved.
Impact on Sally:
As the amount awarded to Sally under a PAO remains part of Harry’s pension fund for SFT / PFT purposes it does not form part of Sally’s fund for SFT / PFT purposes.
If Harry’s pension exceeds the SFT / PFT the tax due on the excess fund is split between Harry and Sally in the same proportion as their share of the pension fund. If Sally’s designated benefit was transferred out before Harry takes retirement benefits, then
Sally’s share of the excess tax will be due from the pension plan that currently holds the designated benefit.
The above information is based on Advice First’s understanding of legislation and Revenue practice as at January 2019. While great care has been taken to ensure the accuracy of the information, Advice First cannot accept responsibility for its interpretation, nor does it provide legal or tax advice. Pension Adjustment Orders are legal instruments and it is for each party to take their own legal advice from their own solicitor.
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