How to Protect Your Finances in Divorce with QROPS & QNUPS Pension Schemes
UK law introduced Earmarking Orders in the Pensions Act 1995 and Pensions Splitting in the Welfare Reform and Pensions Act 1999, however, these are only relevant for UK law. They cannot be attributed to offshore pensions such as QROPS and QNUPS. Thus, you can move your UK pension to a QROPS or QNUPS to protect your pension pot from divorce. There is even a case study which is documented which rules a QROPS does not come under UK law.
Local legal advice in the countries of tax residence of the spouses will be needed to see what can be done with the offshore pension on a divorce. Many offshore countries do not have pension splitting rules, but the pension trustees may be wiling to facilitate any agreement between the spouses, if they can. A Hong Kong QROPS for example has no pension splitting rule in its pension act. UK law cannot dictate overseas pension rules as it stands.
QROPS Divorce Ruling 2016
The Court of Appeal had set aside the entirety of an order of Judge Brasse, who had previously made declarations as to the beneficial ownership of an Indian pension fund and directed the husband to transfer to the wife his interest in that fund. The wife’s claims for a pension sharing order came to be reheard by Judge Justice Mostyn.
The husband argued that even if the fund is beneficially owned by him, the wife’s claim for a pension sharing order should still be dismissed in limine for two reasons:
i) An order for pension sharing under section 24B Matrimonial Causes Act 1973 cannot be made in respect of an overseas pension; and/or
ii) The wife had adduced no evidence that such an order, were it to be made, would be enforced by the courts in India.
When addressing the first argument, whether a s.24B MCA 1973 order can be made in respect of an overseas pension, Mr Justice Mostyn invited written submissions from the FLBA and Resolution. The judge reviewed relevant sections of the Finance Act 2004, the Pension Schemes Act 1993, the Welfare Reform and Pensions Act 1999 and the Matrimonial Causes Act 1973 and was persuaded by the presumption against extra-territorial effect of a statute.
As such, Judge Mostyn was satisfied that pension sharing pursuant to s.24B MCA 1973 is not available in relation to any foreign pension.
However, Judge Mostyn pointed out that just because the court does not have dispositive powers over a foreign pension scheme, that does not mean there are no other routes to achieving direct sharing of a foreign pension. An alternative method is an agreement, backed by undertakings, to obtain an order in a foreign jurisdiction to split a pension in that foreign country. Prior to approving such technique, the court must be satisfied that the foreign pension provider will give effect to the deal.
Under current rules, Hong Kong ORS QROPS are occupational schemes which have no such pension sharing agreement.
Turning to the husband’s second argument, Mr Justice Mostyn accepted that the wife had not filed any evidence that a pension sharing order would be likely to be enforced in India. It was well established that a property adjustment order can in principle be made in respect of property sited overseas provided there is clear evidence that such an order would be implemented in the overseas jurisdiction. However, here, the wife did not file any evidence to confirm that a pension sharing order would be reciprocally enforced in India.
As such, the wife’s claim for a pension sharing order failed in limine.
This landmark case shows that QROPS are very strong overseas pension trusts that may protect from divorce and are outside the realm of British courts.
The presumption against extra-territorial effect of a statute
In the excellent book Pensions on Divorce (Second Edition 2013, Sweet and Maxwell) it is stated at paragraph 6-004 that:
“Once pension rights have been exported then ordinarily the United Kingdom system of pension intervention on divorce would give way to that country to which the rights had been exported.”
Bennion on Statutory Interpretation
Rule 102 is explained as this:
“For reasons of comity, Parliament seeks to avoid any impression that it is purporting to intrude into the area of jurisdiction of some other sovereign power. However, an enactment may operate in a foreign country by virtue of a provision of the law of that country which applies the enactment. International conventions provide for this to be done.”
Rule 130 further provides that:
“Unless the contrary intention appears, and subject to any relevant rules of private international law, an enactment is taken not to apply to foreigners and foreign matters outside the territory to which it extends.”
The commentary on that states:
“If a legislature seeks to go beyond the basic function of government and legislate for foreigners outside its territory it is likely to displease other nations whose function it is usurping.”
So, a QROPS, especially in Hong Kong may protect clients from divorce settlements on a UK pension transferred overseas.
QNUPS and Divorce
Whereas a QROPS is an overseas pension for existing UK pension schemes. A QNUPS is for your other assets, cash, bank accounts, property mutual funds, shares, OEICs, unit trusts, ETFs, etc.
Also, as it is an overseas pension scheme, as far as divorce, a QNUPS falls under the same rules as a QROPS and divorce. A QNUPS may be a suitable pension trust to ringfence investments from creditors and divorce settlements. Should you want to make a payment to an ex-spouse from a QNUPS, normally this would be available under your instructions.
UK Pensions and Divorce Law
The Pensions Act 1995 introduced Earmarking Orders. These are addressed to the pension trustees/administrators and order them to pay a part of the pension to the member’s ex-spouse.
The Pension Act 1995, and subsequent regulations, made provisions to the Matrimonial Causes Act 1973
(MCA) which governs the settlement of marital assets in England and Wales. These provisions came into
effect on 1 August 1996, and apply in cases where the petition for divorce, judicial separation, or nullity of
marriage proceedings was filed on or after 1 July 1996 or where dissolution of a civil partnership was filed
after 5 December 2005.
The problem with earmarking is that nothing is payable until the member retires. If the member dies before retiring, the ex-spouse could receive nothing at all and from the member’s perspective, there is uncertainty in that the Earmarking Order can be varied, so there’s no clean break.
Another potential downside of an earmarking order, for the pension member, is that s/he can be ordered to take a lump sum even if s/he doesn’t wish to do so. This ensures the earmarking order can apply to give part of that lump sum to the member’s ex-spouse.
Finally, the Welfare Reform and Pensions Act 1999 introduced pension splitting. The trustees are ordered to set aside a percentage of the pension for the ex-spouse, as a ‘pension credit’. The split does not necessarily need to be an even split.
This could be transferred to another scheme or kept in the same scheme, depending on the scheme rules. In the UK now, pension splitting orders tend to be more common than offsetting or earmarking.
However, these Earmarking Orders and Pension Splitting Rules are only relevant under UK law and not overseas pension rules. A QROPS may not be required to split a pension scheme.How to Protect Your Assets in Divorce with a QROPS & QNUPS Pension by Richard Malpass