On several occasions you have explained about the use of a sharing order when it comes to splitting pensions following divorce. Can you actually show me how an order would work for the person who will receive the credit and also for her ex-husband, who will lose part of his pension?
If she does not transfer benefits then the following might happen.
First, we have to calculate the benefits that have been accrued. Let us say this is £6,000 a year plus £18,000 worth of tax-free cash. The scheme's actuary will calculate the transfer value, which will differ for age and sex. Let us say it is £100,000.
Many schemes are contracted out. This is something we have to take into account later – but let us assume that included in the £100,000 transfer value is £20,000 worth of contracted-out protected rights.
A further complication would be the allocation of costs. Average costs are ranging between £1,000 and £2,000, say in this case £2,000. Also, let us assume a 50/50 share of both pension and costs.
The pension scheme member will lose a debit of
50 per cent plus the costs, being 51 per cent. This debit is translated into pension today as a £3,060 pension debit and the cash debit of £9,180.
At eventual retirement, when due to additional service and increases in salary the member will receive a bigger pension, the debit of both pension and cash will be deducted from the eventual pay-ment. The debit will be increased in line with the scheme rules, which in most cases will be in line with inflation.
Your client who is receiving the pension credit will receive 50 per cent of the transfer value, again less costs, being £49,000. The protected rights for a contracted-out point of view will be 49 per cent of the £20,000 protected rights – £9,800.
This figure is important should your client wish to transfer benefits into her own personal arrangement as the protected rights portion will not be available until state retirement age and no part of the protected rights element can be utilised to generate tax-free cash.
Unfortunately, if the benefit remains within the scheme no one other than the scheme actuary can let us know the pension that will be applicable to the pension credit. This is causing great difficulty.
Just because the order is 50/50 we have seen through charges that there is already a difference in the pension credit and the pension debit.
Due to the longer life expectancy of women and the younger age of most wives, the pension available for the pension credit will not be half of what the husband is giving up in pension terms. In most cases it will be significantly less.
In this example the annual equivalent pension could be less than £2,400, with a cash sum of £7,200. That pension credit will now remain in the ex-husband's scheme in a separate category. It will continue to increase in value in line with the scheme rules. There will be no increase relative to the husband's promotion or any change of circumstances.
There are two problem areas. The first is the difficulty in estimating the value in pension terms of a pension credit. The second is the fact that many major schemes – certainly all local government schemes and the teachers' pension scheme – will not allow the receiver of the pension credit to take benefits prior to the normal retirement date of the scheme.
Early retirement is not an option. In fact, for one case with the local government scheme, even though the husband had retired early and was taking his pension, the pension credit for that pension in payment created for the ex-spouse had to be deferred until 65.
This means that even though the husband had his pension reduced, the wife who received the pension credit would not receive any income for many years.