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This blog is intended to encourage an exchange of ideas and promote debate about the financial issues that arise in a relationship breakdown. The concept is to create a platform for discussion that is not available elsewhere. Aimed mainly at professionals working in this area; lawyers, accountants, financial advisors and actuaries, it is also a potential source of information for the general public.
In our experience there is a significant variance in how professionals handle pension assets in divorce, with little consensus on which methods give the best outcome. We feel this is due in part to a lack of centralised knowledge and debate on what can be a complex issue. We intend to address this by posting our original articles on key subjects, as well as those contributed by others. Our intention is to post quality, discussion-worthy topics at least once a month, or more often if the need arises.
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When is sharing 50/50 not sharing 50/50?
Hint: just about every time
In a normal world sharing a pension 50/50 would mean giving 50% to each party. However pensions are not part of the normal world. There is a great example given by the University’s pension scheme in their literature that demonstrates this.
The example assumes the divorcee has 15 years service and salary of £30,000. The pension is shared 50/50 and the example then moves on to retirement 20 years later. It assumes inflation of 50% between divorce and retirement, with the member’s salary growing above inflation by 100% to £60,000.
At retirement the member gets a pension of £22,031pa, of which £15,000pa is in respect of their post-marriage service (15/80x£60,000), and £7,031pa is in respect of married service. The ex-spouse gets a pension of £4,219pa.
Read that again. In respect of married service the member gets £7,031pa and the ex-spouse £4,219pa. That’s not 50/50, its 62.5/37.5.
So why does that happen? It’s because the University pension scheme only increases the ex-spouse’s pension by inflation, not by the increase in the member’s salary. And in the example salary increases are double inflation.
I’m not knocking the University scheme here. In fact there is a lot of merit in what it does. For a start the ex-spouse’s pension is totally separated from the future fortunes of the members: the clean break pension sharing is there to provide.
Second the sum of the pensions for the two parties is set to equal to what the pension would have been if there had been no sharing. Sharing does not reduce the total assets of the two parties. The same cannot be said for the way some other schemes implement sharing, where the split might be 50 to the member, 37.5 to the ex-spouse and 12.5 to the scheme.
So what does it prove? First that there are no simple answers with pensions, second that it is essential to understand how a scheme will implement a pension sharing order in practice to work out what the effect of sharing will be.
Are there cases out there which have been shared without finding out how it would be implemented in practice? Could they come back and bite you?
Nigel Bradshaw MA, FIA is Chairman and Design Director of Bradshaw, Dixon & Moore Ltd.
© Bradshaw Dixon & Moore 2008
The Ancillary Actuary
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