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The fair sex

As a family lawyer in divorce cases, I often get asked what is the fairest way to share a simple money-purchase pension. Should it be based on half the capital value or equalising income?

Unfortunately, there is no simple answer and, indeed, there is a third possible solution to the problem.

The pension-sharing legislation is very simple and straightforward. It advocates the use of cash-equivalent transfer values in valuing pension rights in matrimonial cases. Nothing in the pension-sharing legislation deals with the issue of amounts.

Pension regulation, as to be expected, massively complicates the whole issue. Nevertheless, again there is nothing contained in this regulation that gives an indication as to the amounts.

Dealing only with money-purchase schemes and ignoring issues such as guaranteed annuity rates, bonus rates, penalties and charges, the CETV is the value of the kitty accumulated to a point in time. A pension-sharing order is issued and an amount of money will move as a credit to the spouse, with the debit for the member being that same amount of money.

The value of the pension accumulated to date is clearly indicated by the value of the fund and, therefore, what is wrong with sharing it equally between both parties?

If we assume a fund value of £200,000, a 50 per cent share would provide each spouse with a pension fund of £100,000. Using the best open market non-escalating annuity rates, they could buy pensions worth £7,014 for him and £6,768 for her. As it can be seen, because women have longer life expectancy, she will have a lower income.

So, some people, invariably those supporting the female party, would suggest that the share should be based on equalising income. In this instance, this would result in a share to the woman of 51.2 per cent of the pension pot, meaning that they both receive a pension of £6,932.

All these figures disregard the pension commencement lump sum, the new name for tax-free cash, as this would be neutral.

There is no obvious answer to the question of which one of these two routes is correct.

All statistics show that the woman will outlive the man and, therefore, she will receive her lower income for a longer term. This suggests that the 50 per cent share in capital value is the correct way forward. However, case history for financial settlements in divorce has predominately revolved around income levels.

Invariably for people approaching retirement, income is more important than capital. It is easily understood, therefore, why a higher share for the woman can be justified as producing the same level of income.

However, to muddy the waters even further, if we now look at life expectancy, then using one of the more recent mortality tables we can see that for a woman aged 60, there is a life expectancy of 23 years. For a man aged 60, life expectancy is 20 years.

If we ignore inflation and assume a 50 per cent share, where the man receives £7,104 a year and the woman £6,768 a year, multiplying this by their life expectancy means that the total value of the gross pension over the term to their expected deaths amounts to £142,080 for the man and £155,664 for the woman.

We can see that it could be argued that the woman should not have a higher share to equalise income but, in fact, should have a lower share of 47.7 per cent to equalise the total amount of income received over the respective life expectancy. I would stress again that there is no correct answer but the current trend of providing a woman with the bigger share to equalise income can be faulted if life expectancy is brought into account.

The whole area becomes even more complicated when we look at the respective ages of the parties concerned and their state of health. If we are to provide a share based on equalised income, surely we should look at the health of the individuals as higher annuity rates are available on the impaired life market for those with a shorter life expectancy.

For a very ill man, where a significantly higher annuity rate could be achieved, we end up with an even higher share for the woman if we are to look at equalising incomes.

For bigger sums, we start to move into the area of unsecured pension and income drawdown. How are we to create fairness and equalise benefits, when all manner of other factors need to be taken into account, not least investment returns?

Richard Jacobs is managing director of Richard Jacobs Pension and Trustee Services


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