View more on these topics

Splitting headache

In my last article, I identified and discussed a number of important pension issues which I feel are frequently overlooked by many pension advisers and their clients, yet which have the potential either to make or save pension scheme members significant amounts of capital and/or income.

Over my next couple of articles, I will continue this theme by looking particularly at the issues listed below:

Updates to the sharing of pension rights in divorce settlements.
Final-salary scheme design and funding.
Consumer awareness of the need for further retirement income.

First, the subject of pensions and divorce is one on which I have written and presented seminars many times over the past decade or so, as many readers will be aware. I will therefore conc-entrate my discussion in this article on a particular issue which is becoming increas-ing important with regard to pension splitting (also known as pension sharing).

This methodology, when agreed between the divorcing parties or otherwise directed by the presiding judge (or sheriff, in Scotland), involves a share – not by any means necessarily a half-share – of one partner’s pension rights to be transferred at the time of the divorce in to the name of the other person.

I will not elaborate beyond my previous writings about the merits or otherwise for the ceding and the receiving spouse in this process, nor will I repeat my pontifications about the frequent unfairness of the almost invariable use of the scheme’s cash-equivalent transfer value as the basis of any judgement.

Here, I would simply, but crucially, like to bring to the attention of pension advisers and divorce lawyers the sequence of events after a pension sharing order has been made.

Although the use of pension-sharing orders was slow to become accepted by divorce lawyers and the courts in the early months and years, statistics show a marked and significant increase in recent times.

In simple terms, the two parties to the divorce (and their legal representatives and the judge or sheriff) determine (if, indeed, a sharing order is agreed at all) a percentage of the pension scheme member’s benefits which are to be transferred to the other spouse. This agreement, enshrined in a legal order, is then communicated to the relevant pension scheme.

For money-purchase schemes, the subsequent process is almost invariably very simple – a proportion of the member’s fund is transferred into the name of the spouse.

A relatively minor point here (but often an interesting one) is that the transfer to the spouse is made into the same investment fund or funds as that of the scheme member, regardless of the (usually much different) risk profile and other needs and circumstances of the spouse. Surely, here, a financial adviser should be called upon to give advice as to a more appropriate portfolio for the spouse if, moreover, the same pension provider is selected (bearing in mind, particularly, the frequency of spouses who wish to break all ties with their “ex” even if their appears little or no financial merit in doing so).

Where, however, the pension scheme member’s benefits are in a final-salary pension scheme, the situation frequently becomes much more problematic. Sometimes, these schemes will permit the sharing order to be satisfied by what is usually termed an internal transfer in which the receiving spouse becomes a member of the same scheme.

Even with a 50 per cent sharing order, the mathematics behind these internal transfers can be quite complex and very confusing to almost anyone other than an actuary and so the level of the benefits awarded by the scheme to the spouse tend to be rarely contested,

Putting this comment to one side for a while, many spouses seek to break off all ties with their ex-partners and may therefore not want to be part of the same pension scheme. This may seem petty and pointless but it is frequently true. These people may seek the pension-sharing order to be carried out by what is, not surprisingly known as an external transfer, under which the member’s scheme calculates a transfer value which the spouse may then transfer to any other approved pension scheme.

Here lies the major thrusts of this article. To what type of pension scheme should this money be transferred? Who should the spouse turn to for advice in this decision? And, perhaps the most important of all three questions, what are the timescales involved?

On the first two questions, there is little doubt that the spouse should turn to a qualified and experienced financial adviser who should not take it immediately for granted that a transfer should be made to a personal pension – whether stakeholder or not.

It is perfectly feasible that the spouse may be a member of a defined-benefit scheme in his or her own right and, surely, questions should be asked of that scheme as to the level of benefits that would be would granted for this transfer value to compare the relative merits with a money-purchase transfer.

I do not believe it is sufficient or acceptable for an adviser to ignore the option of the potential benefits of a transfer to a new employer’s scheme which, depending on the terms of the transfer-in and the future career intentions of the client, could well prove to be advantageous.

Anyhow, if a moneypurchase transfer is subsequently deemed to be the preferred option for the client, then a suitable investment strategy should be formulated.

It is easy to see the temptation for a financial adviser, who might never conduct a face-to-face meeting with this divorcee, simply directing the client to a routine managed fund or similarly simplistic investment strategy.

It might not need a highly detailed and comprehensive holistic fact-find if this is the only class of business to be transacted for this client. A dedicated fact-find can be fairly straightforward yet more than adequate to be able to arrive at a suitable portfolio of asset classes and funds for the individual.

This leads me on to the third and final question I posed above – timescales.

The transferee (the spouse receiving the pension credit) has only a restricted period of time – usually three months from the date the sharing order is served on the pension scheme – in which to inform the pension scheme of the details of her preferred new pension provider, if an external transfer is to be made.

If a notification is not made within this period of time, the pension scheme itself then becomes responsible for the decision and may make the transfer to any selected approved pension provider and into a fund of its own choice which, without a shadow of a doubt, will almost certainly be either a safety-first defensive fund or, if the scheme wants to live a little more dangerously, a managed or with-profits fund.

Either way, schemes do not want this responsibility and the eventual decision is highly unlikely to be the most appropriate strategy for the individual.

Failing this decision to transfer, the scheme may effect an internal transfer calculated on its own terms – again, probably not what the individual would have wanted.

In conclusion, I hear that far too many of these deadlines are being missed as, perhaps, solicitors and courts are not aware of the procedure after the order has been served or, more likely, do not know who to turn to for advice to be given to the receiving spouse. Think about it.


Diverse DB

Lender Profile – Guy Anker reports on DB Mortgages’ move into the broker market

CML calms interest-only fears

The Council of Mortgage Lenders claims there is no evidence that borrowers are being driven to take out interest-only mortgages without having a plan for repaying the amount borrowed.Research shows that interest-only borrowers take out loans with similar or slightly lower income multiples than those opting for capital-and-interest mortgages.The CML says first-time buyers are less […]

Nationwide in ‘new customers only’ U-turn

Nationwide has ended its policy of offering exactly the same deals to new and existing customers.In communications sent to brokers this morning, the lender, famous for its ‘new customers only’ ads, reveals it is changing its range from December 1 so offers on remortgaging, deal-switching and further advances are more expensive than those for house […]

ABI and Compass launch guide to HIV questions

Specialist gay IFA Compass has co-produced a consumer guide with the Association of British Insurers on gay life insurance to explain the effects of the ABI guidelines on HIV and Insurance.The ABI guidelines were introduced in October 2005 when insurance companies were banned from asking for applicants’ sexual orientation on application forms for life insurance.The […]

Allianz Technology Trust – April 2017

Welcome to the latest update for Allianz Technology Trust PLC from the Trust’s portfolio manager, Walter Price. Portfolio review The Trust’s NAV returned 4.3% , outperforming the Dow Jones World Technology Index return of 2.8%. In US dollar terms, the portfolio gained 4.8%. During the month, stock selection contributed to relative performance, and industry allocation […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm