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No surrender

I concluded my last article – relating to pension rights in divorce proceedings – by expressing my opinion that pension sharing orders will become more widely used in the longer term as their relative simplicity is accepted.

I also believe that divorce lawyers will start to attach more value to the role of experienced and knowledgeable financial advisers in arriving at a fair financial settlement. It is this belief which forms the core topic of this article.

Let me give you a quick example to start with. A married couple with whom I have become friendly are concluding negotiations regarding a financial settlement in the regrettable process of their divorce proceedings. The main assets consist of equity in the matrimonial home of around £200,000 and an endowment policy with a cash-in value of about £20,000. The husband took early retirement from the police on the grounds of ill-health and receives a pension of around £25,000. The wife has no income.

I will deal with the issue of the endowment policy first to illustrate the naivete of the advice given to each of these people. This joint-life policy was effected a number of years ago alongside the mortgage and includes waiver of premium. This remains in force, with the premiums being waived on the grounds of the husband’s ill-health. It is due to mature in 15 years although waiver of premium ceases on the husband’s 65th birthday in about 10 years.

Part of the provisional divorce settlement is that this policy should pass solely to the wife, yet her solicitor encouraged her to encash the policy immediately to release its value even though her current and foreseeable future circumstances do not require her to produce any free assets or income. How can that be good advice when there is an early surrender penalty and, more important, the premiums are continuing to be met under waiver of premium so the policy value will continue to rise significantly over the coming years?

The solicitor noted that this advice was based on the fact that the premiums would not be paid for the entire term of the policy but, even so, why not maintain the policy in force for at least the next 10 years, at which time the wife can take a view on whether to maintain premiums herself for the remaining term or encash the policy at a much greater value than it currently stands?

I gave outline advice to the wife on this point and she confirmed that she did not want or need to take the surrender value immediately but simply wanted ownership of the policy to pass solely to herself as had already been provisionally agreed.

The solicitor then proceeded to write to the insurance company to enquire how to change the policy from a joint-life basis to the name of the wife only. Even if possible, that would have meant that waiver of premium would cease and the wife would have to start paying the premiums.

Needless to say, being asked by both spouses to provide advice on a number of areas relating to their financial provision, I had to step in to direct the solicitor to a preferable way of transferring the policy benefits.

So, on to the pension and the house. The couple had provisionally agreed during mediation proceedings – which use the services of a trained divorce lawyer independently of each spouse’s own advisers – that the husband should retain all or at least most of his pension income to fund his required lifestyle. The wife did not need a share of the income and so the couple agreed in principle to allocate a greater share of the value of the equity in the house to the wife.

This is a typical example of the workings of set-off under which a potential claim against one asset or income stream is forgone in favour of an enhanced claim against a different asset or income stream.

The wife’s solicitor then suggested that the husband’s pension could be “attacked” and then forgone to achieve a 60/40 division of the property equity in the wife’s favour and the husband agreed.

Of course he did. The solicitor’s subsequent enquiries to the police pension scheme revealed a capitalised value of the pension in excess of £400,000. So the wife has been advised to accept £40,000 more value from the house and an endowment policy worth £20,000 in recognition of her forgoing a claim against the husband’s £400,000 pension asset.

I accept that divorce settlements necessarily take into account the needs of both parties but this hardly looks a fair settlement, I would suggest. It would have been even less fair if I had not intervened on the endowment issue.

Apart from this specific example, what areas of advice can we offer to divorcing couples and their legal advisers?

As I have noted in my last few articles, pensions are a key factor. The valuation of pension rights and the issues which might infer that the cash-equivalent transfer value is not a fair reflection of the true value of the member’s pension rights are of particular importance.

The true impact on both spouses of the three main ways in which the value of pension rights might be taken into account – set-off, attachment orders and pension sharing – must be understood by the financial adviser, the divorce lawyer and, of courses, the spouses themselves.

The value of death benefits within the pension scheme will frequently be of particular importance, especially for older divorcees or where one or both of the spouses is in a poor state of health. Many other potential aspects of pension scheme benefits should be taken into account where appropriate but many of these remain a mystery to divorce lawyers acting without professional pension advice.

The possible treatment of other financial products should also represent a key area of advice, as in my earlier example regarding the endowment policy.

Finally, there will usually be a need for specialist mortgage advice for one or both of the divorcing spouses. In my experience, many divorces occur when the couple have suffered financial problems.

County court judgments or mortgage arrears will complicate each spouse’s future ability to secure a mortgage offer, as will reduced income. But at least there is often a hefty chunk of capital available to reduce the loan to value to a level which can be attractive to a number of lenders. Again, specialist knowledge by a mortgage adviser could be invaluable to the clients and very profitable for the adviser.

In conclusion, I would strongly urge divorce lawyers to routinely consult a knowledgeable and experienced financial adviser in the deliberations of many or most financial settlements in divorce proceedings and, therefore, I would urge experienced financial advisers to promote their value to divorce lawyers and their clients.

A complete change of tack in my next article as I look at employer-sponsored benefits for employees. I will use my own smallish firm’s example of a dozen or so staff to examine the reasons why I have provided a well-structured and generous pension scheme, death in service benefit, group permanent health insurance and private medical insurance. It all sounds very generous and it is. However, the cost and the excellent value might surprise some advisers and their clients who have not investigated these benefits.

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