Questions about the Options
5. Pensions and Divorce – what are my options?
There are three possible ways of dealing with pension in divorce.
- Sharing – where a court order is made that results in a debit against the pension of one party and creates a corresponding credit resulting in a new pension for the other party.
- Offsetting – where one party retains a greater or total interest in the pension assets and the other party retains a greater or total interest in another asset or assets of equivalent value.
- Attachment – (also known as earmarking) where a court order is made resulting in a deduction from each pension instalment as it is due and a corresponding payment to the other party.
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6. Why pension share and what should I look out for?
Pension sharing is designed to provide the clean financial break in divorce that Attachment fails to achieve.
Pension schemes have the option to deal with pension sharing either by providing a pension within the same scheme (an Internal credit) or by providing a sum of money which is taken elsewhere to provide the ex-spouse with a pension (an external credit). Most public sector schemes only offer internal credits. Some schemes do not provide dependants pensions for pension credit members and unlike the pension debit member, a pension credit member does not usually have the option to commute part of the pension and take a tax-free-lump-sum.
The retirement age for a pension credit member may also differ from that of the debit member as a pension credit member is usually treated as a deferred member of the scheme. In other words, the same as someone who has left the employment and therefore the scheme before retirement. By contrast, some schemes, particularly those for members of the uniformed services have preferential early retirement terms for active members.
The retirement age for a pension credit member is likely to be 60 or 65. For these reasons, a pension credit member will often find that they start receiving their pension several years after their former partner does. This can be a particular issue if the shared pension is in payment, as the result is an immediate reduction in the income produced by the pension.
If a pension sharing order results in an external credit, the credit has to be invested in a suitable pension arrangement. As this often means a money purchase pension, this means that the credit member bears the investment and inflation risks that may not apply to the pension debit member.
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7. Why Offset and what should I look out for?
Offsetting is the most common option as it is the simplest and least expensive to implement. However, if done properly, account must be taken of the fact that a pension is not like the cash (“liquid”) assets that it is commonly offset against.
There can also be problems where the liquid assets are insufficient to fully cover the value of the pension that is to be retained by the pension holder and this then leads to a solution involving both a partial offset of the pension and reduced pension share.
Our reports are able to deal with combinations of pension sharing and offsetting because the first thing we do is to place an independent and market-consistent value on the pension and then we use actuarial techniques and economic principles to adjust the pension value so that it appropriate for offsetting purposes.
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8. Why use Attachment and what should I look out for?
Pension attachment orders could be compared to a form of maintenance where the payment is made direct from the pension scheme. Attachment orders have several disadvantages.
- The pension ceases on the death of the pension and therefore the recipient’s pension also ceases.
- The attachment ceases if the recipient remarries.
- The attachment and pension payments only commence when the scheme member retires, the recipient is unable to influence the retirement date, which could be deferred by the member.
The rules dealing with assets, and therefore pensions in divorce, differ between Scotland, where only the pension “earned” during the relationship is counted, and England, Wales & NI where often all the pensions are counted.
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9. Are CETVs for final salary schemes appropriate to use for pension sharing?
There are up to six reasons in general why we believe that the Cash Equivalent Transfer Values (CETVs) for final salary schemes are not usually appropriate values for use in divorce. Three of these reasons also apply to Cash Equivalent Benefits (CEBs) for pensions in payment. We have a factsheet you can request by using the form on the Contact Us page which will explain this in detail.
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10. How do BDM calculate pension shares?
We use a bespoke computer program to calculate pension shares. Due to the number of different types of schemes, variations in scheme rules and benefits, sources of data and different possible objectives from a pension share this program is extremely complicated.
It is therefore not possible to provide for any specific case, except at disproportionate cost, the derivation of any pension share result.
However the principles are relatively simple. We project forward year-by-year relevant values, such as the chance of each party being alive, the current value of money in each year, the salaries of active members and the deferred benefits of leavers, any tax-free lump sums and the amount of any pension income. We then multiply together factors for each year and total them as required. We determine which pensions we consider are the most financially efficient to share, and calculate the effect of a pension share by reproducing how a share would be implemented in practice. To meet specific objectives we iterate on the percentage pension share, and we try different combinations of pensions to share so as to test which is the most efficient result. We then extract the numbers into our reports. It is an approach commonly adopted by actuaries for all sorts of financial projections.
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11. Why would I request an Express Pension Valuation?
The Express Pension Valuation (EPV) is an excellent proportionality tool that is often used when considering whether the expense of a full court-compliant actuarial tool is justifiable. The EPV can also be useful in negotiating a possible settlement. Where the pension value is relatively modest compared to the other matrimonial assets, it might also be used as a basis for the settlement without needing to obtain a further report. The cost of the service is £70 + VAT (or £100 + VAT if the pension is already in payment).
The valuation process is designed in such a way that it does not to require input from the pension scheme and to return an immediate result. It can therefore be used to:
- produce an estimate of the value of pension assets; and
- validate CETVs and determine whether the cost of a detailed actuarial report would be proportionate to its benefits
The Express Pension Valuation has a number of limitations inherent in its design. In particular
- it is dependent on the information provided by the client, which may differ from the definitive information held by the pension scheme;
- its treatment of the complexities of different pension scheme designs has been simplified to concentrate on significant differences in pension design; and
- it has been necessary to simplify the valuation by ignoring generally second order effects such as the difference in value on contracted-out rights versus other rights and the specific effect of death in service.
Due to these limitations, we would not recommend the Express Pension Valuation is used to evidence pension valuations in court during the ancillary relief process, except where the lawyer is confident that the limitations are not significant in the context of the value of the pension rights.
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