Pension sharing on divorce
On divorce in later life, Pensions are often the largest asset not jointly owned. For those who are getting divorced earlier in life, whilst planning for retirement may not be the biggest immediate concern, ever increasing life expectancy means the importance of securing a Pension income for later in life cannot be ignored. For those with no Pension provision of their own at retirement, their only source of income could be the State Pension (currently £102.15 per week, although the Government have recently proposed to increase this to a flat rate for all of £140 per week). The majority of people we speak to do not think that they could live comfortably on this level of income.
Due to the complexity and ever-changing nature of Pension regulations, Pensions can be difficult to fully understand and as a result, the true value of a Pension can often be understated. In this article we look at how financial advice can add extra value to your clients that own Pension assets at the point of divorce. The starting point of course, is how the Pension benefits are valued:
Cash Equivalent Transfer Value (CETV)
One of the key areas where value can be added for a client is on agreeing a split of a CETV. Typically, a CETV is used to value pension rights. However, a CETV does not take account of any other benefits that may be attached to a defined benefits or ‘final salary’ scheme (such as death in service, early retirement or future pension increases), which can be very valuable, especially in special schemes such as the Police or Fire Service Pension schemes.
Crucially, the CETV is also calculated as if the member of the scheme was leaving service on that day when in most cases, the scheme member will accrue further valuable pension benefits that the ex-spouse will not benefit from.
An undervalued CETV is a big problem if the ex-spouse is not allowed to remain in the scheme as a ‘shadow’ member and has to transfer to an alternative provider. Taking financial advice at the CETV stage can help assess if a higher percentage of the CETV should be awarded to the ex-spouse to compensate for the loss of these additional valuable benefits.
However, assessing what represents a fair split of a CETV is not the only way in which financial advice can give your clients a better outcome:
How financial advice can add value throughout the pension sharing process
Initial guidance – Advice is often required on the advantages and disadvantages of the key options, namely pension sharing vs. earmarking vs. asset offsetting. Looking at these from a financial planning perspective, given the clients personal circumstances and objectives can make a big difference in the level of income received in retirement.
Equality of outcome advice – By looking at certain factors such as age, gender, attitude to risk, and the Pension scheme rules an accurate value of a Pension can be obtained and allowing a ‘fairer’ percentage to be awarded to either the pension scheme member or the ex-spouse.
Placing a Pension credit – Advice is often required on where best to transfer a Pension share credit if shadow membership is not available. The most suitable course of action depends heavily on the client’s personal circumstances and objectives.
Beyond divorce and at retirement – someone receiving a Pension credit may have no previous experience of managing investments and will need to make ongoing decisions about their pension both during the accumulation stage and on reaching retirement.
Rebuild lost provision – any pension owner who has received a Pension debit against their pension needs to consider how best to rebuild their pension provision and savings.
The importance of a sensible retirement plan
Each of the above areas can have a significant impact on a client’s income for life in retirement. Due to the complexity of this area of planning, we recommend taking professional financial advice!
Who can help me to put a sensible plan into place?
Professional Financial Centre (East Midlands) Ltd has helped many clients to put a sensible financial plan into place for the rest of their lives. When looking at the huge choice of arrangements available we are able to prove that we only have your interests at heart. We do not have a vested interest in choosing one particular product or course of action over another. As changes happen, we review our clients’ plans, adjusting them to meet changing economic circumstances and family needs. If you want to challenge us to do the same for you or your clients, you will not be disappointed. If you simply want a second opinion, our view on your existing holdings, or have a general query about financial matters, please call us.
As a result of our qualifications, experience and culture, we qualify to be included on the SIFA Professional Directory of IFA’s, which is endorsed by the Law Society.
As a member of the Derby Law Society, by quoting code LS1 you and / or your clients will receive a 5% reduction in our costs.
Richard Shanks (Managing Director)
Professional Financial Centre (East Midlands) Limited
Wesley House, St Michael’s Lane
Authorised and regulated by the Financial Services Authority. This article is not a recommendation and you should obtain appropriate advice before acting on any of the information provided.