Fiona Tait analyses the role of pension advisers during a matrimonial break-up.
In most divorce cases, financial assets are fairly easy to find and assess. But even in a relatively amicable split, one of the hardest assets to find and value is pension savings.
This is particularly true if the marriage has been a long one, as is becoming more common. While overall divorce rates in England and Wales have reduced over the past 30 years, the rate among older individuals continues to increase.
The divorce rate for men over the age of 50 has increased by 36.2%, and for those over 60 it has risen by 26.1% (albeit from a very low base). The trend is greater for women over 50 (40.8%), but lower for those over 60 (17.6%).
This has profound implications for individuals and their advisers – partly because they will have had more time to build up capital assets, and partly because it is not uncommon for assets to be primarily owned by one partner. Where this is the case, a financial adviser can make a considerable difference to the eventual financial settlement.
First, advisers must persuade their clients of the necessity of making a legal settlement. While it is possible to get a do-it-yourself divorce, this process merely brings an end to the marriage. Any accompanying financial settlement is not legally binding unless ratified in court.
Second, ensure all the relevant assets are taken into consideration. Pensions are notoriously easy to overlook. A matrimonial lawyer is obliged to ask if their client/client’s spouse has any pension arrangements.
A financial adviser will hopefully already have these details, along with a full employment history, which would help expose any potential gaps.
Valuation checklist
The trickiest part is making sure you have the best valuation for your client. While the eventual settlement will be made based on the cash equivalent value (CEV), there may be some leeway in how this is calculated.
The actuary calculating the CEV within a final salary scheme must make a number of assumptions – most notably inflation, wage increases, future annuity rates and investment discount rates. A financial adviser should check the following:
• Is the calculation actually correct?
• Are the assumptions reasonable? (A scheme actuary is obliged to consider the interests of the scheme membership as a whole and is likely to produce a more conservative valuation than an independent actuary.)
• Are there individual factors relative to the divorcing parties, which should be taken into account? (It will usually be assumed that a female spouse is a few years younger than the male; should she be a lot younger, any widow’s pension would be worth considerably more.)
If any of these factors apply, the adviser has to consider whether obtaining another valuation is likely to result in a big enough difference to justify the costs incurred.
This is most likely to be the case where the member spouse has a long period of service and/or the scheme has special features, such as generous early retirement provisions.
Splitting assets
Once the matrimonial assets have been valued, a decision has to be made on how they should be apportioned between the clients. In the case of pensions, there are three options for members who have not yet reached retirement:
• Offset the value of the pension against other financial assets (this approach is favoured by lawyers as it affords a clean and easy break)
• Use an attachment order to ensure some or all of the scheme benefits direct to the ex-spouse (since the order does not come into effect until the benefits are paid, it is not a popular option)
• Use a sharing order to transfer ownership of some or all of the pension to the ex-spouse at the time of the divorce.
Solicitors in the third situation will be looking to agree a settlement which minimises the need for future contact between the ex-spouses. Financial advisers will be mindful of their client’s current and future income and capital requirements.
An older client who has minimal pension assets may find the most efficient way of securing any retirement income is to take advantage of their ex-spouse’s pension.
A client with considerable pension assets may find it preferable to give some away rather than have to raise a cash sum.
Financial advisers are ideally placed to ensure any sharing orders are enacted efficiently. If an external transfer is agreed, a qualified adviser is required to oversee this transfer.
For mature clients, advice may be needed more than ever.
Fiona Tait is pensions specialist at Royal London
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