I am a small family lawyer. Thanks to your help, most of my staff now have
a better understanding of pensions. Our main concern is how the different
pension schemes lend themselves when considering offset, earmarking or
pension sharing. Can you advise us?
Everyone thought that pension sharing would be an easy way to deal with
the division of pension funds in a matrimonial dispute. What we are
finding, however, is that the issue of pension sharing is only a starting
point and the associated advice in this very complicated area is similar to
that which was necessary, but disastrously not provided, in the events
leading up to the pension misselling debacle.
Generally, with regard to offset, you will obtain a transfer value
representing the cash equivalent of the pension funds and will offset other
assets of an appropriate value. It is merely a question of how relevant the
cash-equivalent transfer value is.
There are a few issues which can affect the way you handle the financial
settlement. Also, whether you are looking to receive or retain the pension
benefits might affect your view.
Two very topical areas that need to be looked at most closely are those of
demutualisation bonuses and guaranteed annuity rates. There are several
insurance companies in the process of demutualising. Does your
cash-equivalent transfer value take into account this virtually guaranteed
With the Scottish Widows fund, I had one client with a £30,000 fund
who received an £18,000 bonus. This is obviously vitally important
where offset and sharing take place but would also be taken into account as
a future value for earmarking.
Guaranteed annuity rates are more complicated. My experience at the moment
is that, for someone retiring today with a guaranteed rate, we are looking
at an uplift in benefits of around 20 per cent.
Cash-equivalent transfer values would generally not take into account
guaranteed annuity rates. But it is important, particularly with older
retirement annuities, to ask whether guaranteed annuity rates apply. If
not, seek advice as to what additional values should be placed on pensions,
particularly from an offset and sharing point of view, especially if
retirement is close.
Obviously, if a funded scheme is in surplus or deficit, this could affect
the calculation of the cash-equivalent transfer value, so you need to ask
With final-salary schemes, we are used to identifying a benefit at
retirement and its current value. However, with money-purchase schemes, we
do not know what value will be available at retirement. Obviously, we can
make various assumptions but, with the advent of income drawdown, care has
to be taken.
For a 60-year-old man retiring today, purchasing a single-life pension
without any escalation, utilising a fund of £100,000 he could
anticipate purchasing an annuity of £7,800 a year. If, however, he
were to use income drawdown, he would be able to start drawing a pension of
anything between £6,300 down to £2,200.
If an earmarking order is in place promising, say, 50 per cent of the
value of the pension at retirement, then undertakings must be considered.
The pension scheme holder, instead of purchasing a £7,800 pension,
could merely draw down an income of £2,200. This may not be in the
spirit of the original order.
Obviously, this would have a major impact on earmarking but not offset or
Generally, the use of self-invested personal pension plans and small
self-administered occupational schemes is well understood. In law, these
are no different from normal personal and occupational pensions except that
you are allowed to invest in a wide range of different investment vehicles.
Care has to be taken that the valuation of such investments is fair to all
parties. Where you come across such schemes, it is important that you get a
valuation from a professional source relevant to the type of asset.
Finally, the old retirement annuity is not dead but more than ever very
appropriate, particularly for older professionals. The cash-equivalent
transfer value, taking into account demutualisation and guaranteed annuity
rates, should be acceptable for use in financial settlements. Care has to
be taken, however, that where a pension-sharing order takes place, a
pension credit cannot remain in the retirement annuity as the law does not
allow the creation of such benefit. If a pension credit is created, the
benefit will have to come out to another scheme.