What needs to be considered as part of the divorce process when it comes to your pensions?
According to the Office of National Statistics, divorces of opposite sex couples aged 60 and over has risen from over 8,000 in the early 1990’s to around £14,000 in 2018.
Pensions can be amongst the most valuable assets in divorce, usually secondary to the family home and sometimes they can be even more valuable. Furthermore, one spouse may have accumulated more in pensions than their spouse so pensions should be a key consideration in any financial settlement.
Appointing an Independent Financial Adviser (IFA) from outset is a wise move. Lawyers are not usually regulated, qualified or insured to provide you with financial advice. You will need to establish your income needs so there is a major advice need point. If you are receiving a pension credit you will need to choose a suitable destination pension provider. It could be the case that you feel vulnerable throughout the divorce process too so having a group of professional advisers to hand can prove to be invaluable.
You will be required to complete a Form E for disclosure of all your financial assets. This will include all your assets, liabilities and income for both parties. Pension contracts are largely split into two types of arrangements and valued as follows:
- Defined contribution or money purchase. This is valued by the fund value and will move up and down depending on how it may be invested into the stockmarket and the contributions paid.
- Defined benefit or final salary. The value is determined by the scheme actuary who will provide a Cash Equivalent Transfer Value (CETV) using a number of their own assumptions.
Defined contribution schemes can have other features and benefits which may be valuable. For example, a guaranteed annuity rate or a loyalty bonus. Your Lawyer will need to be made aware of these but they also may not have the knowledge, permissions or qualifications to provide you with regulated advice.
Defined benefit schemes use their own actuaries to calculate a CETV. They will use their own assumptions which may not always be realistic. We usually recommend that an independent actuarial report is required. If the incorrect assumptions are used or these are not realistic it could lead to an unfair financial settlement.
John and Sue are getting a divorce and agreed on a pension sharing order. John has several pensions from different careers:
|Executive Pension Plan
|Personal Pension 1
|Personal Pension 2
|Retirement Annuity Contract
Sue has not accumulated any pension savings as she has been bringing up their children. Their Lawyer has determined that John should share his pensions with Sue and asked an IFA to analyse the pension arrangements.
The IFA concludes that:
- the Executive Pension Plan has protected tax free cash and because of this important benefit this should be retained by John to avoid any loss of benefit.
- the Retirement Annuity Contract offers attractive guaranteed annuity rates so, again, this should be retained by John.
- once the other assets are considered the IFA and Lawyer agree that Sue should receive 100% share on Personal Pension 1 and 90% share on Personal Pension 2 and 0% on the Executive Pension and Retirement Annuity Contract.
In this example, it is clear that the adviser has added value to the decision-making process and enabled the clients to reach a fair financial settlement whilst retaining some valuable benefits from the pension funds.
We can conclude that your IFA should be working alongside your Lawyer and Actuary throughout this process.
Once your divorce has been finalised, you should also consider some other aspects of financial planning. You may wish to change the nominated beneficiary against your pension arrangements or require advice on how to rebuild your pension savings after the pension debit has been transacted.
To learn further about how a professional Financial Planner can assist with your circumstance please contact Kreston Reeves Financial Planning on +44 (0)1227 768231 or provide your details on our online enquiry form.
The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice.
You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.
Kreston Reeves Financial Planning Limited, Independent Financial Advisers. Authorised and regulated by the Financial Conduct Authority.
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