Value of pensions.. is this reasonable?

Hi,

As you are finding the area of pensions and divorce if fraught with unnecessary complications. Enough to make the simplest things needlessly frustrating!

You appear to be approaching matters in the right way. When advising I look at four key areas, and then try to place these in the context of both of your goals and objectives. I then try to educate and inform on the most appropriate approach so that the settlement is fair to both parties.

The main things to consider are:
1. What type of pensions are they - If DB there will be more going on (for example, potential for undervalue, etc)but DC can have certain nuances and it is important not to forget state entitlements.
2. Are they in payment. This affects options but also the...
3. Valuation - The biggest area and one to take time over and really understand, (money spent on an actuarial report is vital), particularly when looking at the...
4.Options - what are the options to deal with the pensions. Each will have merit but might not achieve the Clean Break or may mean compromise on either side.

I hope this helps as a starter. Anymore, please post again or PM.

Regards

Phil

Although I am a Resolution Accredited Independent Financial Adviser my comments are given here as general guidance based on the (often limited) information available and does not constitute financial advice. They should not be seen as a substitute for detailed financial and legal advice.

Many thanks for that

I do have a couple of assumptions that I need to check (I'm learning that my assumptions are often wrong!).

If we split a pension, all of the pensions say that the ex-spouse needs to name a pension to transfer to. Unless her current pension allows further payments (which I will need to check), she will need a new scheme, which I am assmuing will be little more than fund management (she is only a few months off being able to claim a pension, though she may defer it).

The value of any money (to her) transferred will then be equal to either cash or whatever can be bought in the way of annuities. Is that right?

I'm trying to work out the value to her (and what she could get in the way of a pension) for the funds transferred. She will be 60 later this year, and she smokes. For my estimation purposes, I am assuming about 300pa for each 10,000. Does that seem way off?

Of course, ear-marking could be a better option. However, as she is 7 years older than me and almost at pensionable age, waiting 7 years is unlikely to be feasible.

You know, this is a useful exercise anyway. I am learning something about what my pension funds will be worth to me (something I was always concerned about, but only now discovering - and while I need more, it's not quite as bad as I feared!).

Hi,

It is good to see that you are taking the positives from this.

Taking your points in turn I would comment as follows:

pension sharing - two routes - internal or external route. Internal route can be better for spouse but may not be available. Private schemes rarely offer it whilst public sector schemes only offer internal transfers.

External route - Transfer to existing arrangement or new one. The benefits can be deferred, and invested, as you suggest or transferred to an annuity and drawn immediately. If your pension is not in payment then she has access to 25% TFC as well.

Indicative rates for a 60 year old female smoker range from approx 4% for 3% escalation in payment per annum to c.6% for no escalation. The fact she is smoker is important and should not be overlooked in any calcs...

Now the big question is always what should the % splits be. Not an easy question to answer without getting some actuarial assistance first. You can do some initial calcs on 50:50 based on the rates above.

Have the other side let you know what they are looking for from the settlement?

Earmarking will not give you a clean break and has a number of other drawbacks including as in your case the issue of retirement age differences.

I hope this adds some value. Let me know if you need anything more.

Regards

Phil

Although I am a Resolution Accredited Independent Financial Adviser my comments are given here as general guidance ­base­d on the (often limited) information available and does not constitute financial advice. They should not be seen as a substitute for detailed financial and legal advice.

That was very useful, thanks again

The more I look at this, the less I am interested in CETVs, except as a headline figure (which is useful for describing the proposed split in simple terms). What is much more interesting is what a pension fund can actually provide.

I think I have my head around that now, except in one area.

Her scheme, and two of mine, are (I think) DBs. I assume these are schemes in which a pension figure is quoted (as opposed to those that just give a fund value and no annual pension payout).

Are there particular benefits that are sometimes attached to such schemes that are specially valuable, and should be noted?

If I can look at a guaranteed pension payout from a DB scheme and see the escalation of it, I can see the annual payout. If I can see a fund value and I know what that will buy in annuities, I can see a payout. That is easy enough.

There may be other benefits that have particular value also, though. Of course, that would depend on whether they have a value to the recever. I am thinking of her pension in particular, here.

As an aside, she had only given me the fund value on that pension, but is now getting the full CETV. I am expecting the CETV to come in at around 120K for a £43,500 fund, but we will see. KInd of irrelevant, except that it makes her percentage "take" seem better.

She is seeing a FA tomorrow (at my suggestion) and we will talk after that. I am interested in reaching a fair agreement, and one that is based on a real understanding that she can live on what is in the pot when she finishes working. We were married for 30 years and I want her to be OK.

I will need advice too, but I do want to do my homework first.

The way things are looking is like this (but I know I need more research).

She is 59. I am 52. Our children are all grown up, but one lives with me.

The total fund (estimated, awaiting her CETV) is around 467K.

Of this, she can get around 3,700pa from her own pension She will also have a chunk of my funds.

I am considering an offer of around 45% of my funds, while she keeps her pension. This will provide close to 60% of the pension (CETV) "pot", and give her around 157K in funds on top of the 3,700. This fund would pay an additional 7,800pa, roughly, (based on escalation of 1.5-2%) - giving 11,500K pa plus state pension (assuming that she converts it all to annuities - and there are other options, but she needs advice on that).

If I do that, I will be left with around 7.5-8K at today's rates, plus a fund of about 37K (or around 1,900pa in an annuity) - a total of about 9.5Kpa in today's terms plus state pension, which is lower than her pension - and yet I have a higher earning power and time to make up the difference.

So.. three questions.

Any particular "valuable" benefits commonly in DBs to look for?

Does the offer I'm considering seem way off, or in the bounds of "normal" and fair? I should add that I am also considering a similar offer (60%) on the proceeds from the family home, which I expect to give her around 135K as well. Also, I can earn around 3 times what she can (roughly 70K versus 23K). As a reminder, I'm looking for a clean break with no spousal maintenance. Sorry if I'm asking the impossible question to answer here!

Lastly, can she take the 25% tax free from the fund and leave the rest deferred if she chooses to? Or does she have to buy annuities if she takes any cash? Some of what I'm reading isn't clear on that.

I'm very grateful for any help (and for the help already given!).

"If we split a pension, all of the pensions say that the ex-spouse needs to name a pension to transfer to."

Just to say in these circumstances, where final salary schemes insist on transfers out or offer membership to an ex-spouse only on a defined contribution/AVC/money purchase basis, it's worth the effort to search for a fair way to avoid splitting those final salary pensions - in my experience splitting a final salary pension where the trustees insist on the ex-spouse transferring her share out or allow the ex-spouse to retain her share within the scheme but on a money purchase basis only - that is a very good way to reduce the real value of a final salary pension and make the trustees very happy to lose a lot of their pension liability/promise to you.
Not sure of the nuances but I would have a really good go at avoiding "crystallising the loss" resulting from transferring final salary pensions - no-one in their right mind would accept the CETV and transfer out in normal non-divorce circumstances - too lousy a deal.
As I understand it final salary pensions are index-linked in payment - losing just that added value and trying to replace index-linking as part of an annuity costs a fortune.
Some schemes have valuable guaranteed annuity rates ...and so on.
The rules of final salary schemes are so individual and their treatment of a share of a pension split on divorce so variable ....for peace of mind - given the size of the fund - unless the rules are crystal clear and you're sure you know all the benefits and conditions - I think advice from a pensions actuary/analyst would be well worth the money.

Hi,

I will add what I can.

Are there extra benefits in DB scheme? Yes - you bet. Some of them are obvious - death in service, ill health, others are less so discretionary increases to pensions in payment for example? Some schemes have a history of this.

There are also negative issues to consider - deficits, for example.

I am not in the camp that says there is NEVER a reason to transfer to DC from DB, but the justification needs to be done.

As for the offer I will leave that for others better placed to comment. In my opinion it seems reasoned and well thought out. You could offer this and see what the response is from the other side.

Can she defer the income? Yes, under the rules a lump sum can be taken and no income. The destination pension pot would be different (i.e. NOT an annuity) but a personal pension or SIPP.

Her adviser should guide her on what is best for her circumstances, etc.

I hope that helps some more.

Regards

Phil

Although I am a Resolution Accredited Independent Financial Adviser my comments are given here as general guidance based on the (often limited) information available and does not constitute financial advice. They should not be seen as a substitute for detailed financial and legal advice.