The problem: A couple are in the process of divorcing but the husband, with the significantly higher pension, is thinking of early retiring before the divorce process is finished. The solicitors for both clients want to know what effect this would have on any pension share.
Issues to be looked at:
- Understand significant advantages and disadvantages of retiring before and after the serving of a pension sharing order.
- The availability for pension commencement lump sum from any pension share must be explained.
- Understand the process for sharing a pension in payment.
- Identify when any pension credit will be available to the wife, regardless of early retirement or otherwise.
The idea of crystallising a pension before financial settlement has been agreed in divorce proceedings in the main can have negative effects, in this situation, for the wife.
There is, however, one significant advantage in that any pension commencement lump sum taken by the husband can be brought into the assets early, pre-divorce and utilised accordingly.
Early retirement invariably means an actuarially reduced pension. Mathematically, the valuation of this pension should be similar to the higher deferred pension, payable at a later normal retirement date. However, the loss of the pension commencement lump sum in the CEV calculation needs to be taken into account with, invariably, the valuation of a pension in payment producing a higher CEV than that for a deferred pension.
A significant disadvantage to the wife is that any pension sharing order placed against a pension in payment means that any pension credit the wife receives cannot be used to generate any pension commencement lump sum at any time. This is regardless of the amount, if any, of pension commencement lump sum taken by the husband on early retirement.
Also, no pension commencement lump sum can be paid from such a pension credit, regardless of what happens to the pension credit, even if it is transferred to a personal pension. If a pension share is placed against a pension in payment, then the husband’s pension will immediately reduce.
It must be remembered that the process for implementing a pension share can take many months, which can often require a repayment by the husband of overpaid pension from the date the order took effect.
If a pension share is placed against a pension and then the member retires early, a lower early retirement pension will be payable to the husband because a pension debit will need to be deducted from the early retirement pension. In this situation, the wife is unaffected, having access to her pension credit in accordance with individual scheme rules.
Every pension scheme can individually choose how they deal with a pension credit. They can decide whether the credit remains in the scheme, such as unfunded public sector schemes, be transferred out of the scheme like most personal pensions or provide the wife with a choice, as in local government pension schemes.
If the pension credit is transferred out, the wife will have access to benefits from her age 55 subject to receiving scheme rules. If, however, the pension credit must remain in the scheme, many schemes will not provide any benefit for that credit until normal retirement date.
The situation could arise for the above clients that he early retires before any pension share is implemented, he takes all the pension commencement lump sum, a pension share is implemented with the pension credit for her not being available until her 65th birthday with no pension commencement lump sum being available from that pension credit.
It is possible, by agreement, or in extreme cases by a court order, to prevent early retirement while divorce proceedings are in progress.
Richard Jacobs is managing director of Richard Jacobs Trustee & Pension Services