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Final salary member's pension after sharing

  • maggie
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15 Dec 07 #9089 by maggie
Topic started by maggie
A final salary pension giving a pension income of £25000
a year in 2008 is shared 50/50 on divorce.
How much pension income will the final salary member be entitled to in 2008?
How is the member's pension calculated?

  • NE0
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15 Dec 07 #9096 by NE0
Reply from NE0
this is the complexity of pensions because to get close to an answer I would need to know more. the member has just lost 50% of their pension's CETV. which is different to 50% of the income that the schem would pay. in your scenario they are retiring imidiately post penshion share which means that the cetv should be as close as it will ever be to the full fund value. but the actuary who prepares the cetv is allowed to use industry recognised tables for their assumptions on longevity, inflation and fund growth. these assumptions may well difer from the ones the scheme usues for its members. bottom line is the pension scheme will allways look to protect the members so it will use the best calculation it can getaway with for producing the lowest cetv it can. hence why an independent actuarial report can make a big difference. so in answer t your question a 50% share imidiately prior to retirement is likely to redult in a pretty damn close split in the pension income on a 50-50 basis. As to how the members pension is calculated the depends on the structure of the scheme;if it a money purchase arrangement then its nice and easy as there is simply les left after the share to buy the pension income (annuity) with. if its a final salary arrangement its another actuarial calculation to reduce their benfits.
are you after a guide figure to help in your negotiations? with some more info I may be able to help

  • Peter@BDM
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16 Dec 07 #9128 by Peter@BDM
Reply from Peter@BDM
Hi Maggie

A pension sharing order results in a pension debit against the pension that is shared, and a corresponding pension credit. The pension sharing order specifies the exact debit to be made in terms of the Cash Equivalent Transfer Value (CETV). If the divorce is in a court in England, Wales or Northern Ireland the debit is expressed as a percentage of the CETV, in a Scottish court, it is expressed as a cash amount. On implementing the pension sharing order, the scheme recalculates the CETV and creates a debit against the pension. When the pension debit member retires, the scheme will calculate the benefit entitlement and reduce this by the pension debit that was applied.

The pension credit side of the equation is rather more complicated.

Focusing just on the pension debit member. If as in your example,
a) they had accrued an annual pension entitlement of £25,000 before the pension sharing order (PSO) AND,
b) the PSO was for a 50/50 share of the CETV, AND
c) the pension debit member then immediately retired (at the schemes normal retirement age), AND
d) there were no other special features,

Then the annual pension at retirement would be 50% of the previous entitlement, i.e. £12,500. However, in deciding on PSO shares, lawyers often treat pensions as income rather than capital assets and therefore the pension share is determined so that the pension incomes of the credit and debit members achieve the required objective. For example, the share may be calculated so that the debit and credit members both receive the same pension income at a specific age or date, say when one of the people is aged 65. It is almost impossible for a 50/50 CETV share to produce equality of incomes. This is because the actual pension that a given pension “pot” will produce depends upon the age and gender of the member.

I raised the spectre of “special features” and these can come in many guises. For example, if the CETV quoted by the scheme and used in implementing the PSO was reduced due to the scheme being underfunded, the calculations can go awry, because the underfunding is unlikely to result in a reduced pension for the pension debit member when they actually come to retire.

The pension credit side of the matter depends on several factors. Of these, one of the most significant is whether the scheme will permit the pension credit to produce benefits for the member in the same scheme and with exactly the same benefits. For simplicity, I will assume that they will. Using your example, the scheme will use 50% of the pension debit CETV to create benefits for the pension credit member. So, in this case the Cash Equivalent Transfer Value really will result in a (50%) transfer out of the scheme – which is then transferred back in for the pension credit member. The original CETV calculation will have effectively converted the value of the £25,000 pension into a capital value (the CETV). So, the transfer in or pension credit is just a reverse of the same calculation, albeit producing a pension entitlement for a person of a different gender and probably a different age.

Whether the pension credit member can start drawing the pension will depend upon the scheme rules applied to pension credit members. Probably the most important of these is the age at which the member can retire without a reduction in the pension. By law, the normal benefit age for pension credit members must be between 60 and 65.

I suspect that my response will raise as many questions as it answers. I am happy to help if I can



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