There is no getting away from the fact that pensions can be complicated. It’s a shame that this is the case when most people will need a pension to provide them with an income in retirement. No wonder pensions are often mistrusted and uptake is low.
Pension sharing is a complex area. Our advice is to seek assistance as early as possible.
Nonetheless, pensions often form an important part of the finances to be considered when divorcing, so seeking advice that educates and guides individuals to a fair conclusion is vitally important. We take time to strip away the jargon and ensure that divorcing couples understand how pensions and the pension sharing process work. Our reports are written in plain English and we welcome face to face meetings to explain and discuss matters in greater depth.
Not all pensions are the same, and in most cases just adding up the valuations and dividing them on a 50/50 basis can create very different incomes in retirement, which generally isn’t what is required.
Broadly speaking there are two types of pension:
Final Salary Pensions
Final salary pensions (sometimes referred to as ‘defined benefit’ pensions) promise the member a pension at retirement based on their salary and number of years’ service. Any pension share applied to these schemes will be based on the valuation the scheme has calculated. The share may result in either a physical transfer of funds into a pension plan the receiving spouse has chosen, or the share may be used to set up the receiving spouse as a new and separate member of that same pension scheme.
Money Purchase Pensions
Money purchase (or ‘defined contribution’) schemes are individual pension pots that belong to the member and have clear and transparent investments within them which generally can be valued easily. At retirement this pot of money can provide an income in various ways. At retirement this pot of money can provide you with an income in various ways. Of growing popularity is to draw down from the invested fund a bit like a bank account, however, some like the certainty of a known income which can be established by buying an annuity. However, some prefer the certainty of a known and guaranteed income which can be established by buying an annuity. In many ways sharing this type of scheme is much simpler. If money purchase pensions were the only type of scheme held and both spouses were similar in age and invested in a similar fashion then a 50/50 share could produce similar incomes in retirement.
Most pension schemes should provide annual statements that will give an idea of the income you could receive in retirement. Sometimes they can be a bit complicated (blame the Regulator!) but the scheme helpdesks (or us) can often help explain.
Sharing pensions on divorce is typically based on dividing the pensions to produce equal incomes at retirement. It is not really practical to detail here the finer points of how this is achieved, as the processes can be very complex. In essence, it involves a mathematical calculation that endeavours to share the pensions in a way that provides maximum benefits for both parties.
On occasion we may be asked to consider alternative scenarios whereby one party retains their pension (or a larger share of it) with the other retaining a greater share in another asset, for example, the family home. This is commonly known as ‘Offsetting’.
A Pension Sharing Report will show how pensions should be shared to create equality, and what the resulting income might be at retirement. Consultation with a Financial Planner can help to make sense of the income you can expect in retirement, which is obviously important when considering your financial future. We use cash-flow modelling to illustrate how your financial future might look in an easily understood graphical format. This will allow different scenarios to be visualised at a time when there may be many permutations for you to consider.
Pension sharing is a complex area. Our advice is to seek assistance early so that you have time to become familiar with the process, consider the options available and what outcomes would work best for you. Don’t sleepwalk into the process or feel bullied because you don’t have enough information or support. Gathering pension information and getting a state pension forecast (https://www.gov.uk/check-state-pension) is going to be important.
Posted on February 1, 2018