Jan 15
Pensions and Divorce A recent case in the financial press highlighted the importance of obtaining specialist advice when considering the part that pension entitlements may play in a divorce settlement*. In this particular case, a divorce lawyer dividing up assets between a husband and wife did not obtain a valuation of benefit entitlement from the scheme and performed an incorrect calculation on the wife’s National Health Service pension. The clients’ lawyer based the value of the wife’s pension benefits on the cash lump sum she would receive and multiplied it by four, on the basis that pension funds allow 25 per cent of the total fund value to be taken as tax free cash. As a result, the wife’s pension entitlement was vastly undervalued and the pension sharing order awarded an overly generous percentage to the husband. It may now be necessary to see if the pension sharing order can be amended, resulting in a delay and additional expense. When looking at the assets of a marriage, pensions should, of course, be included. Generally speaking, it is often best advice for each party to retain their pension rights on divorce and instead share the value of another asset such as the house or an investment portfolio.
If pensions need to be shared, expert advice is needed to obtain and interpret the valuation received from the pension provider. For final salary (defined benefit) schemes, there are a number of potential issues, including: Whether discretionary benefits are excluded from the calculation. In this case the ex-spouse might argue that this is not a fair value especially if the scheme’s practice has always been to pay these discretionary benefits. The Cash Equivalent Transfer Value (CETV) provided for an early leaver from a final salary occupational scheme is less than ideal when used to provide a divorce valuation for an active member of a final salary scheme. The CETV is based on the member’s service to the date of leaving and allows for any required revaluation to the member’s benefits from that date to their retirement date. This may be seen as inappropriate where it is anticipated that the member’s earnings will increase more rapidly than the revaluation rate, or where scheme benefits are expected to be enhanced in the future.
Although most family law solicitors are now well aware of the available pension options, the complexity of the pension legislation mean that they will often need assistance in understanding the legislation and in advising their clients on the most appropriate option.
Why Thomas Carroll? We have the honour of being named ‘The Chartered Financial Planners of the Year1 by the Personal Finance Society – the body which grants Chartered status to IFA firms and individuals. Our title demonstrates the excellence, commitment to professionalism, training and development of our people which our clients and professional colleagues have come to expect from us. We have recently been awarded Firm of the Year2, Corporate Adviser of the Year3 and Retirement Planning Firm of the Year4 by Bankhall Group, the UK’s largest distributor of financial services.
Contact us If you wish to discuss the content of this brief in more detail please contact Louise Eedy directly on 02920 855244 or e‐mail louise.eedy@thomas-carroll.co.uk This information is based on our current understanding of UK law and HM Revenue & Customs practise and legislation we believe may apply in the future. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments. 1 Awarded by the PFS in 2009 2 Awarded by Bankhall Group in 2014 3 Awarded by Bankhall Group in 2012 and 2014 4 Awarded by Bankhall Group in 2010 and 2011