As a family law solicitor, I thought that I understood pension sharing. However, I have a client who has no pension rights while her former husband is in receipt of his pension. Can you explain how the pension sharing order applies in this case?
This is probably one of the most complicated areas of advice. The whole pension misselling scandal centred on people with a pension benefit who moved it to another type of pension in the belief they were obtaining something better. All the issues involved with the pension misselling scandal apply to the advice relating to the use of pension credits in divorce cases.
First, it is possible to create a pension credit for a pension in payment. This immediately raises problems for insurance companies that provide annuities as they will have to place a value on the annuity already in payment. The same applies to those bigger pension schemes that do not buy annuities but merely pay pensions from the fund.
The value placed against the pension in payment will utilise current financial conditions. It is also possible to take account of the current health of the annuitants.
Your first step will to ask the provider of the existing pension to place a value against the pension. In effect, the original pension can be considered as being “unbought”. The court will then decide what amount of this value, if any, will become the pension credit.
Having successfully achieved an order, the pension will be split and the member will have a new pension calculated for them based on the lower value. Interestingly, this could result in a disproportionately higher or lower pension being paid as the new pension will again be based on current financial conditions.
Although the original pension was in payment, your client will not only be able to maintain a pension bought in their name for the pension credit value but will have all the options open to them with regards to a normal pension share. She will be able to move the credit to another insurer and purchase an annuity or take income drawdown. She can transfer it into another pension scheme or not take benefits at all, depending on her age.
The options open to your client are extremely complicated and, as mentioned at the beginning, involve all the issues relating to the pension misselling scandal, namely, the giving up of guaranteed benefits for the promise of something better.
To assess the benefit to your client, we will have to look at her income needs and compare those with her income now and in the future. The obvious route of buying an annuity now might not be the right route. Also, do not forget that the pension share will not create an equivalent pension. By this, I mean that if, for example, a 50 per cent credit is created, your client will not receive a pension of 50 per cent of her former husband's pension. Both will receive different pensions. Your client has a greater life expectancy so her pension will be less then her former husband's in this case.
The fact that her former husband's pension will be “unbought” and then bought again taking into account current financial conditions will also cause difficulty. Again, using a 50/50 split, the former husband's post-split pension could be greater or less than half his previous pension.
Today, all you require is to obtain from the pension provider a value of the pension in payment. You must then use this in the normal way. If a pension credit is to be obtained, we must sit down with your client and discuss with her the many options open to her with regards to its value.
In a recent survey of all the funds ranked AAA, AA or A by Standard & Poor's and by Feri Trust, the well-known German rating agency, 87.5 per cent of Fidelity's funds were shown to have one of the top three ratings.
Threadneedle came next, with 71 per cent of its funds being rated AAA, AA or A, followed by Britannic, Baring, Newton, Invesco Perpetual, HSBC, Lazard, Royal & Sun Alliance and Schroders. The poorest performers in the survey were Lloyds TSB and Axa.
Certainly, I agree that both Fidelity and Threadneedle are brilliant overall fund management companies but even Fidelity has the odd dog, such as Fidelity Asean.
There are several smaller groups which have some outstanding funds among them.
I particularly like BWD UK smaller companies, Liontrust first income, all the new trusts from New Star and four outstanding trusts from ABN Amro – its UK growth, UK special opportunities, UK equity income and high income trusts.
On the income side, congratulations must also go to Bill Mott of Credit Suisse and to Hugh Priestly and his colleagues for Rathbone income.
In the smaller companies sector, in addition to BWD's fund, Rathbone UK smaller companies should prove to be a winner, while Artemis and Premier have also made very good starts.
Jupiter still has some excellent funds and it undervalued assets trust should perform well.
Overall, I expect world stockmarkets to continue to be volatile in the first half of this year but to move ahead again by the autumn.