Pensions can be an important part of any financial settlement in a divorce. Relevant to the information required about the pension is its ‘cash equivalent transfer value’.
There are many different types of pension schemes and the cash equivalent value is used time and again as the measurement of value. There are underlying problems with this method of valuation which can prove problematic in divorce situations. If the divorcee is eligible for a final salary scheme pension, the cash equivalent value is often not large enough to buy the same benefits on the open market. An example could be a teachers pension scheme with a final salary in the region of £30,000 and its cash equivalent value approximately £650,000; but the cost of buying an equivalent annuity commercially is likely to cost double that amount.
Lawyers can get hung up on arguing that the final scheme valuations are undervalues. It is, however, futile arguing about these differences in values. What is relevant is the amount that needs to be passed from one to the other to achieve parity of income.
Three types of transfer to consider:
Internal or Shadow membership:
The only way the pension provider will administer a pension share is by way of internal transfer rights. The cash equivalent is irrelevant in this situation. It is the pension incomes that are important and that the share amount should be “reasonable”.
Cash transfer:
A specific percentage is passed as a cash transfer to another pension scheme. This is where shadow or internal membership is not allowed. Again, there is little point arguing about the cash equivalent value as it has no real relevance to the production of incomes.
The recipient can then invest the sum coming out of the fund until his or her retirement date, at which point a purchase of an annuity is assumed. It is what the pension produces in income which is relevant. The cash equivalent value is only relevant for calculating how much needs to be shared externally to produce equal incomes.
Armed with this knowledge, and understanding it, can cut down hugely in a divorce on the cost and timescale of obtaining unnecessary actuarial valuations.
It should be borne in mind that the person taking out the money purchase pension may be subject to more risk than the person whose pension money is still guaranteed in the final salary scheme. Sharing a final pension scheme is preferable for this reason.
Offsetting:
The alternative to pension share is the recipient spouse giving up his/her right to a pension share in return for a cash lump sum. The reasoning behind this is that the recipient spouse will invest the lump sum to produce an income for retirement. Often, however, in reality, the recipient spouse requires the immediate cash for another purpose. Good legal advice is required to ensure a client is making the right choice for them.
Actuarial advice is helpful given the recent legislative changes in pension law and the plethora of options available to investors. We, as solicitors, are constantly updating ourselves with regard to the complex and ever changing landscape of pensions. We work closely with actuaries to always ensure that we are able to give our clients excellent pension advice. Should you require further advice on divorce and pension divide therein, please contact a member of our family team who will be happy to advise.