View more on these topics

Parting of the weighs

Most pension issues rise or fall in prominence due to changes in legislation, regulation or social trends. The importance of the topic I will be talking about in this article – pensions and divorce – is influenced by all these factors and many more.

Much has been written about this subject but you may have noticed that such commentary has fallen very quiet over the past year or more.

As an enthusiastic and active participant in this market for over 10 years – working closely with a large number of law firms around the country – it strikes me that this apparent lull in interest can be explained only by an inability or unwillingness by many advisers to relate to divorce lawyers or properly explain the importance of the service they can offer law firms and their clients.

In this article, I will start by reminding readers of the fundamental principles of the ways in which pensions should be taken into account in divorce settlements. I will then highlight and discuss the ways in which financial advisers can help divorce lawyers and their clients.

The core legislation in England and Wales is the Matrimonial Causes Act 1973 as amended by further legislation and regulations, most notably the Welfare Reform and Pensions Act 1999 which introduced the option of pension sharing as a means of dealing with the value of pension rights in divorce settlements.

More or less parallel legislation exists in Northern Ireland. Although Scottish divorce law differs from the rest of the UK in some respects, the basic and important principles are exactly the same or very similar. I will highlight significant differences but, for relative brevity and ease of explanation, will use the legislation in England and Wales as the start point.

The first important point of which financial advisers should be aware is the fact that divorce lawyers and the courts are now obliged to take into account the value of the accumulated pension benefits of each party in determining or agreeing the overall financial settlement.

This apparently simple statement hides a couple of essential issues. First, it must be realised that although the value of accumulated pension rights must be taken into account in determining the overall financial settlement, this does not mean that these rights must be divided. Simply, their value should taken into account in much the same way as the value of the couple’s investments or matrimonial home.

In short, whether or not the value of pension rights is taken into account is not an option, it is an obligation. But the value of pension rights is not considered in isolation. It is considered as a part – usually a very important part – of the divorcing couple’s overall financial situation.

The first way in which the value of pension benefits may be taken into account in divorce situations is variously known as set-off or offsetting. A simple example illustrates this point (see top table).

A start point for David and Jane’s settlement would be an equal division of the £600,000 assets. This could be achieved in a number of ways but a simple solution, depending on each of their needs and circumstances, might be for Jane to keep the matrimonial home and value of her pension rights and David to take all the other assets while retaining his own pension rights.

This example illustrates set-off in its simplest form but ignores the fact that the respective incomes of each partner must also be taken into account, as must, of course, the financial needs of any dependent children.

The eventual settlement will be much more complex but our example at least illustrates the potential to use set-off as a means of taking the value of pension rights into account.

Two other methods of considering the value of pension rights are attachment orders and pension sharing. Each has its advantages and disadvantages depending on the requirements and circumstances in each case.

Attachment orders (known previously as earmarking) involve a direct attack on an individual’s pension rights, as opposed to merely their consideration in the overall settlement, and must be the subject of a specific court order. The nature and scale of the order must be determined at the time of the settlement but no payment is made to the spouse until benefits start to be drawn. An illustration of an attachment order in respect of final-salary benefits is shown in the bottom table.

If an attachment order is made, the capitalised value of David’s pension (the CETV) will not be taken into account – at least not in its entirety – as part of the set-off arrangement outlined previously.

Given a free choice, and before even considering the option of a pension sharing order, would David and Jane prefer set-off or an attachment order? The consequences of each person’s future death or remarriage (to list only two of the essential considerations) must be taken into account. I will consider these in more depth in future but, to conclude this article, I will outline the basic principles behind pension sharing.

A pension-sharing order requires a formal transfer of pension benefits at the time the settlement is made. David and Jane’s situation is considered in the middle table.

In my next article, I will start to look much closer at the detail and implications of each of these three courses of action.

When these issues are understood, it will become obvious how the adviser can add value to the work of divorce lawyers and the interests of their clients. Then it is simply a question about how we should be remunerated.

Recommended

Curry favour

Hats off to Lansons Public Relations executive Jeena Nadarajan when asking a stroppy editor about his dietary requirements on behalf of a client and getting email complaints about wild mushroom in mushroom gratin. She replied: “If I was the cook, you would all get vegetable samosa, fish cutlet and a variety of chutneys, masala dosa […]

NU and Rock lead rise in equity-release rates

Equity-release rates could be set to rise across the market after Norwich Union and Northern Rock increased their lifetime mortgage charges. NU personal finance director of sales and marketing Darren Carter believes other providers could follow suit, reversing the trend of softening rates over the past year. Money Marketing revealed last month that an unnamed […]

Key plans move into IHT and annuities

Key Retirement Solutions is planning to buy its way into theinheritance tax planning and annuity markets funded by private equity group Cabot Square, which has bought a 60 per cent stake in the firm. Key is looking for acquisitions to sit alongside its existing equity-release business, which it plans to grow by recruiting 40 new […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment