Ways to deal with pensions and divorce
Question: I am currently going through a divorce and understand that my pension has to be taken into account. Can you outline what options are open to me and how I will be affected?
Answer: The treatment of pensions on the breakdown of a relationship has come along way over the last 15 years or so.
The first thing I would point out is that what I am about to outline in the next few paragraphs is only generic information and it is vital that you seek professional legal input to guide you through your available options. In most instances, divorcing couples agree a financial settlement with the help of legal advisers or mediators, so their involvement around pension assets will be crucial.
There are three ways in which a divorcing couple can have the pension dealt with.
Firstly, the courts may use the pension fund to be offset against other matrimonial assets.
Secondly, the courts may make a pension attachment order, which is sometimes also referred to as “earmarking”.
Finally, they may grant a pension sharing order.
However, before any of these options are looked at, the first thing that needs to be done is to value the pension as an individual asset. The prescribed method of valuing a pension for divorce purposes is the Cash Equivalent Transfer Value (CETV).
The CETV is the capital value of the pension rights as calculated by the scheme actuary or pension provider.
For some types of arrangements the CETV may be the total value of the individual’s fund, whereas for other types of arrangement, for example a final salary scheme, the value may have to be calculated by the scheme actuary.
The basis of calculation of the CETV means that it only relates to pensionable service built up to the date of the calculation. Therefore, it will not take into account any future expectations arising, for example from future salary increases or the anticipated promotion of the scheme member to a more senior position.
Equally the basis of the valuation, if it relates to a personal pension, will be based upon a snapshot at one point in time.
So if, as we are experiencing at the minute, there are low levels in the stock market generally, it stands to reason that if a CETV is given today, it will be greatly reduced from a figure say six months ago.
Additionally, if the fund is invested in a With Profits Fund, account may need to be taken about the possibility of market value adjustments, which will apply again in times when the stock markets are in a depressed state.
Having established the CETV, the next step is to decide the most appropriate method of apportioning the fund. The first method, previously touched upon, is offsetting. This will involve taking a global view of a spouse’s assets and compensating for the loss of pension rights by redistributing other assets such as investments or property.
The second method — an attachment order — will see the courts instruct the pension trustees to pay all or part of the members benefit to the ex-spouse upon retirement or death.
The final option — a sharing order — will see the courts divide the pension benefits between the couple at the point of divorce. This in effect will see a legal transfer of all or part of the benefits from one spouse to the other.
The most appropriate method will vary according to the type of pension arrangement you have and what other assets can be taken into account.
But as I stated at the outset, it is vital that you seek professional input in this area.
Raymond Mulligan is managing director of Johnston Campbell, a company of independent financial advisers regulated by the Financial Services Authority. For further information, please contact email@example.com or (028) 9022 1010.