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Split decisions

I am about to get divorced and I have heard that the rules surrounding pensions have changed. What do I need to be aware of?

Pensions are often a very important asset in divorce proceedings. Next to the former matrimonial home, the pension provision of one or both spouses may be the biggest capital asset in the marriage. How pensions are treated in divorce is a question which has assumed greater importance, especially since the Pensions Act 1995 and the Welfare Reform and Pensions Act 1999.

Research by Standard Life shows that in divorce cases where pension assets have been involved, 11 per cent either had to give away part of their pension rights or received pension benefits from their ex-partner.

Do be aware that during the course of the last recession in the early 1990s, levels of divorces increased.

According to the Institute of Social & Economic Research, for every unexpected 10 per cent fall in house prices, an extra 5 per cent of couples will split as the hard times are just too hard for many of them.

There are three options that can be taken with pensions when a divorce takes place:

  • Balance the pension rights against another asset such as the matrimonial home. This is known as pension offsetting.

  • Arrange that when one party’s pension eventually comes into payment, a portion of it will be paid to the other party. This is known as pension earmarking.

  • Split the pension at the time of the divorce to give both parties their own pension pot for the future. This is known as pension sharing.

    When it comes to valuing the pension assets, there may be a cash-equivalent transfer value produced by the scheme administrator or pension provider which represents the value of the member’s benefits assuming they are leaving pensionable service at that time. This may be appropriate for a money-purchase scheme but for more complex arrangements, it does not take into account such additional benefits as death-in-service payments, spouse’s rights and discretionary benefits provided by the trustees. In other words, the result is not a fully valued CETV.

    You may have heard of the new rules that came into effect on October 1, 2008 concerning the responsibility for calculating CETVs within defined-benefit occupational pension schemes moving from scheme actuaries to scheme trustees. The new rules also provide slightly different methods of calculating CETVs which are available from The Pensions Regulator.

    If you want to dispute the CETV and feel that other benefits should also be considered, a pension audit can be undertaken which may increase the value by looking at past service reserves or assumptions built in to accommodate promotions and/or inflation, surpluses or underfunding in final-salary schemes or approaches to the fund value assuming the scheme is wound up.

    In other words, an adjusted CETV may be permitted by the court or agreed between you and your ex-spouse.

    You may have also read about changes to be brought in from April 6, 2009 following the longer than expected journey of the Pensions Bill through Parliament which are contained in the Department for Work and Pensions’ response to a consultation on pension sharing amendments, which remove many pension restrictions for those divorcing. This means the terms available to pension scheme members must be applied to non-members. For example, any protected rights’ values previously received under a divorce are known as safeguarded rights and must be taken as regular income from age 60 while the member can take the same benefits from age 50 with 25 per cent taken as a tax-free lump sum or a pension commencement lump sum as this amount is now known. The abolition of safeguarded rights is a welcome move for those divorcing.

    Pensions and divorce can be a complicated technical issue and professional advice should always be sought.

    Kim North (Kim@techand tech.co.uk) is founder of Technology and Technical

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