Welcome
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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Pension values in divorce – pitfall number … 99?
A recent announcement by Standard Life presents a simple argument for why you might need professional input from your friendly IFA or actuary when looking at pension values in divorce.
The announcement by Standard Life involves its Self Invested Personal Pensions - or SIPP to you and me. These plans are popular for those who wish to use income drawdown instead of an annuity to provide an income in retirement. Incidentally, income drawdown is now more correctly called Unsecured Pension – still with me so far?
So, what is the earth-shattering announcement from Standard Life? Well, they are introducing a £750 charge for all new customers who transfer out within the first 12 months. That sounds reasonable, Standard Life want to hang on to their investors and don’t want them taking all their money away to an alternative provider in the early days of their relationship.
Why is this important to the overworked family lawyer?
The detail of the announcement is that the £750 charge will not apply on what they quaintly call “life events” or divorce, terminal illness or death to you and me.
Getting to the point of where the pitfall lies for the unwary family lawyer. Imagine the situation where you get the current values of the pension assets in a divorce case. These happen to include a transfer value of a SIPP, all perfectly reasonable so far. However, the transfer value is exactly that, the amount that would be provided if the fund were transferred to another provider. Are you confident that you would spot the £750 charge, or that it would not apply if the transfer is made on divorce, or that it only applies in the first twelve months?
To labour the point a little, which value is appropriate in a divorce? If it comes to a pension sharing order, then clearly the transfer charge will not apply. But what if you are thinking about offsetting? By implication, in offsetting the pensionholder will retain the pension the charge will not apply and therefore the fund value ignoring the charge should be used.
Do not run away with the thought that this is only an issue with Standard Life policies and the more exotic arrangements like SIPPs. There are numerous similar traps such as Market Value Adjustments – also known as Market Value Reductions; your friendly financial professional will be able to help.
Apples & pears
The moral to this story is that great care needed when looking at pension values in divorce. A colleague of mine is occasional heard to remark that comparing pension values using scheme valuations is not even a matter of comparing apples with pears; it is like comparing a whole basket of fruit!
We will do another post on the issues of comparing defined benefit pensions using scheme CETVs. Take care when looking at what should be the simpler defined contribution pensions. If in doubt consult your friendly IFA or actuary – you owe it to your client and professional indemnity insurer.
The Ancillary Actuary
2 Comments
Reader Comments (2)
It is often thought that defined contribution or money purchase schemes are easy to deal with, particularly, in comparison to final salary or defined benefit. There are more pitfalls within DB arrangements but there are plenty of areas that can be missed with DC schemes.
I have written a number of blogs on the risks associated with SIPPs and how this can impact upon divorce. http://www.thedivorceifa.co.uk/self-invested-personal-pensions/pensions-divorce-sipps-unquoted-shares and http://www.thedivorceifa.co.uk/self-invested-personal-pensions/pensions-divorce-self-invested-personal-pensions-%e2%80%93-what-are-the-risks
If anyone would like assistance with any aspect of pensions on divorce, feel free to contact me on 0800 092 1229 or phil@thedivorceifa.co.uk
On a similar level it can be difficult for the unwary to even know they have one of these plans as they look just like any other personal pension and more and more providers are replacing the “standard” personal arrangement with these type of plans.
The second and perhaps more important point is the costs that can be associated with pension sharing that are not always fully considered when looking at a pension share as part of the settlement, particularly in the case where the value of the plan is relatively low. There is no limit on how much trustees can charge for processing a sharing order and costs can be £1,000 or more. On relatively small funds this may make a pension share a costly solution. If you then consider that this fee often has to be paid by the transferor / transferee out of their own resources (i.e. it can’t be taken from the fund) then it may mean the beneficiary never takes the action needed in order to transfer the pension.
Pension sharing will often form a valid part of any relationship breakdown settlement, but there can be many traps for the unwary that could lead to client dissatisfaction or even a PI claim.
As a Chartered Financial Adviser, I must confess to having a vesting interest in this and needless to say I would be delighted to discuss any aspect of pensions in connection with family breakdown. I can be contacted my email at trevor@wensumifa.com or by phone on 01603 731170