Since 2000, a pension sharing order has been available as an option on divorce. With the ability to achieve a clean break this should be the option of choice for most divorce cases where the pension benefits are significant (and earmarking / offsetting have been discounted).
A lot of focus is rightly given to ensuring that an equitable pension share is achieved and here the use of a suitable actuary is advisable. However, in my opinion, less time is given to the options available once the pension share has been calculated and many clients approach this stage with unnecessary fear and trepidation.
With a pension share there are two options - an internal or external transfer - and either option can have its merits depending upon circumstances.
With an internal transfer the pension does not physically move from the existing scheme but a debit and credit is created to satisfy the pension share. Most importantly, the internal scheme benefits can differ significantly. For example, some final salary schemes offer shadow membership whereby the same defined benefit rights generously apply to the new member whilst others provide poorer value money purchase equivalents.
With an external transfer the fund value of the pension share is physically transferred to a new arrangement in the individual’s name, with the associated issues of understanding the investment and annuity risks involved but having the benefit of control.
- Here are a few suggested considerations which will assist in deciding which type of transfer is appropriate.
- How flexible is retirement and who decides when retirement can start.
- How much pension income will be payable at retirement and how secure is it.
- How much risk is involved / could my pension fall in value.
- What are the death benefit arrangements and who will ultimately benefit.
- Can future pension contributions be paid.
- What are the charges involved.