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What are we each entitled to in our divorce settlement?

What does the law say about how to split the house, how to share pensions and other assets, and how much maintenance is payable.

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The four basic steps to reaching an agreement on divorce finances are: disclosure, getting advice, negotiating and implementing a Consent Order.

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A Consent Order is a legally binding document that finalises a divorcing couple's agreement on property, pensions and other assets.


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Pension Steps

  • Blue Rose
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21 Sep 12 #357110 by Blue Rose
Topic started by Blue Rose
Hi… I am new to understanding in my divorce… it is very complicated. From reading and chatting on wikivorce… I want to see if I have understood the basic steps in pension sharing in general… and see if it is possible to break it down into three steps just as a “starting point” to get my head around the basic concepts and process. I know it is vital to get expert advice (independent financial advice and Solicitor) to consider your own unique factors that can very significantly impact how each of the steps then applies to your situation. I''ve tried to use my own terminolgy as I am not expert in the correct ones yet!


Simplified scenario assumptions…
So… in this simple case where husband has just the one sizable pension, the wife has no existing pension (and very small salary potential pre/post divorce), wife and husband are same age and NEITHER near retirement and have been in a long marriage and the majority of pension funded during the marriage, no consideration of benefits in death of husband, and wife is likely to get majority share of the marital home net asset value (as looking after kids under 10yo).


Basic Steps:

1) Find the considered “TOTAL PENSION POT” £ value of the pension
2) Get agreed your particular divorce “% PENSION ENTILLEMENT” share of this “TOTAL PENSION POT” value
3) Convert the TOTAL PENSION POT value into an ENTILLEMENT SHARED VALUE


1) Find the considered “TOTAL PENSION POT” value
• Start process by asking pension PROVIDER for their pension report.
• It is in your own best interests to find a fair Total Pension Pot “value” of the pension, and it may need and independent actuaries report (where the valuation should cover widow’s/widower’s death benefits, if applicable). This is not always easy, especially for “Final Salary” pension reports, as these are notoriously undervalued by their pension providers. E.g. look at the Provider’s own pension report… and compare the TOTAL POT VALUE v’s how much it then “pays out” in benefits/lump sum, is there an obvious huge discrepancy? So, if the pension seems to pay out… £10k PA pension plus a large lump sum value as benefits, but the Provider’s Total Pension Pot value quote is only quoted as “£100k” then that may appear an undervalued total pot size on the provider’s report for those forecasted benefits. (Using the annuities and pensions comparison tables from the FSA is useful to see get a feel what size of Total Pension Pot value “buys” what pension benefits PA pension value).
• Typically if there is doubt (e.g Final Salary types) about the reported Total Pension Pot value , recommended to spend about £50 to get a quick pension actuaries valuation. If this quick actuaries valuation comes back and says the Total Pension Pot value is significantly MORE money (than the Provider’s own reported value), then it may be worth considering a formal actuaries valuation at nearer £500 to assist, but check with your solicitor before requesting. E.g… so if requested, the right “type” or report is requested (e.g a “joint report”) so there is “no” risk of this not being recognised by a potential judge and the actuaries report is considered “fair” to both husband and wife.


2) Get agreed your particular divorce “% PENSION ENTILLEMENT” share of this “TOTAL PENSION POT” value
• No hard and fast rules here – as it is based on what your entitlements are factoring all the other asset sharing going on in the divorce, and your own specific/personal/needs and circumstances (or if the wife has her own pension)… total available savings/debts etc. E.g.. If wife is getting 100% of asset house value, then it may be agreed that the husband may keep (say) 100% of the pension, or it may be it is agreed to be 50:50 split of all assets and pension… so it may be a 50:50 split of the Total Pension Pot Value.
• There seems a huge debate in what is considered the “% Entitlement” of the Total Pension Pot value when considered with all the other UNIQUE factors of what (assets/arrangements/needs) are already being shared. Expert advice always needed for your own circumstances.


3) Convert the TOTAL PENSION POT value into an ENTILLEMENT SHARED VALUE
ie “ENTILLEMENT SHARED VALUE” = “TOTAL PENSION POT” value times the agreed “% PENSION ENTILLEMENT

Then this ENTILLEMENT SHARED VALUE can then typically (but not only) be used as follows…

• 3a) converted into the WIFE’S pension in her own right (e.g by simply direct transfer of the pension funds for the agreed ENTILLEMENT SHARED VALUE).

or…

• 3b) converted into a “% CASH DISCOUNTED” value to be used for “offsetting”.
Typically, this DICOUNTED CASH VALUE may follow the (so called) “25% rule” of the ENTILLEMENT SHARED VALUE but individual circumstances/judges/pensions types/ may well be able to influence this discounting % into a “cash” value significantly. There are no fixed rules in practice on what this % may be in individual situations.
• There is a lot of debate of what value” % DISCOUNTED” should be in specific circumstances. A significant factor is husband/wife’s respective ages and how close to retirement and the lump sum value. e.g. The actual discounted % may vary from 25% to a higher % depending on specific circumstances… or if near to retirement age, the large “lump sum” pay out may be considered more significant and NOT the Total Pension Pot value!
• Or 3c… it may be agreed to have a mixture of 3a and 3b… but… there may be a real high real cost (from the Pension Provider in their fees) and tax implications in making a pension transfer for 3a that may make 3b more negotiable.
• Or 3d… if the husband may be “financially disadvantaged” by a significant cash offsetting value, a judge may decide it is fairer that the wife takes ENTILLEMENT SHARED VALUE only as direct pension transfer into the WIFE’S pension in her own right (and not as % “cash” discounted equivalence). Eg. where the husband needs some cash for deposit for a new house.
• Or… as I am grasping… getting good specialist advice to understand the worth of a “pension” is vital, as there is in practice huge freedom how to best and fairly split (or not) this financial resource in your individual circumstances (having taking all other factors /needs/assets into account)!

EgA
1) His TOTAL PENSION POT value = £100k,
2) Wife % PENSION ENTILLEMENT = 50%
Wife ENTILLEMENT SHARED VALUE = 100k * 50/100 = £50k
Then…
3a £50k transferred to wife pension
or
3b) If 25% discounted cash value to wife = 100k * 50/100 * 25/100 = £12.5k cash value used for offsetting


Eg B,
1) His TOTAL PENSION POT value = £200k,
2) Wife % PENSION ENTILLEMENT = 50%
So… wife ENTILLEMENT SHARED VALUE = 200k * 50/100 = 100k
Then…
3a) £100k transferred to wife pension
or
3b) If 25% discounted cash value to wife = 200k * 50/100 * 25/100 = £25k cash value used for offsetting

  • maisymoos
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21 Sep 12 #357138 by maisymoos
Reply from maisymoos
Blimey you have been busy;)

I think you are over complicating things.

Yes you need pension CETV''s to work out the size of the total pot. The percentage share to each party is not a simply mathematical formula, it needs to be considered alongside the rest of the asset split and and the Section 25 criteria of the Matrimonial Causes Act. If you can reach an agreement to a fair percentage all well and good.

There is also no fixed formula to convert pension to cash. Yes the figure 25% is sometimes mentioned but each case is different. Is coverting to cash affordable?

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21 Sep 12 #357151 by Blue Rose
Reply from Blue Rose
Thank you for the comments, I agree totally with you that the 25% is not a fixed formula… and I apologies if I have not made this clear… as I commented there is a lot of debate of what this value % should be in specific individual circumstances (sometimes higher or lower). But, what I was trying to show was overall “process” and steps that are potentially considered… which individual circumstances then influence.. and show (if applicable) where this “%” (whatever the % value is in the specific situation) is used. I wasn’t trying to be prescriptive on %values… but try and show the process and give a worked example to see if the logic was ok!

BR

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21 Sep 12 #357240 by maisymoos
Reply from maisymoos
You understand what you are dealing with, but if it went to Court a judge would not approach it in this way. He would decide how pension pot should be split (or not split) depending on circumstances in an attempt to leave parties on an equal footing.

It''s then a case of deciding how to apply the percentage and to what schemes if there are more than one.

A judge would consider the whole asset share in deciding how and if a pension share order is to be granted. I do not believe cash exchange is normally something a judge would consider, unless there is a clear communication that this is acceptable to both parties. A pension sharing order especially if parties are a long way from retiring would normally be more appropriate.

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22 Sep 12 #357313 by Blue Rose
Reply from Blue Rose
Ah yes… how a “pension” is split (or not) is a very different question!.. and how this is applied in individual circumstances is what I am now learning about! Yes, the question for the court is how to distribute the parties’ assets fairly having regard to the matters/circumstances of the case, and I wish to base our negotiation at mediation on the same principles and applied to our specific needs… But, there is no “one” right way of distributing the overall assets/pensions/debts …so I need to be fully conversant with the process for establishing what a pension is “worth” as a financial resource (as I now understand, pensions are not true property nor true income to equate straightforwardly as capital assets)... and keep all options open as to how a Pension can be “used” based on our/my overall needs. So.. my next three steps are

- Obtain the information
- Understand the information
- Then, decide what to do!

And, as I am learning you need specialist knowledge at each step to do this!

BR

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