Your Money Magazine :  Pensions and Divorce

by Grant Hughes Dip PFS, Director. (Feb 2001)

I read in the paper recently that Guildford, Surrey, has the highest divorce rate in Europe!

I don't know whether it is true, after all you can't always believe everything you read in the Press!

It is true though that we, as Financial Advisers, get involved in a lot of enquiries through solicitors when couples divorce and their pension benefits need to be quantified.

The Matrimonial Causes Act has for many years stated that when dividing a couple's estate, the pension plans should have been taken into account. However, it was not until the 1995 Pensions Act and various Case Law around that time, that it became the duty of a solicitor to obtain the necessary information to assess the value of the pension plan, and take it into account against the other assets of the marriage.

Most people are far more concerned about who gets the house, the cash in the bank and the investments, and neglect to investigate pension plans which can be very valuable assets.

For example, I spoke to one client recently who had been 13 years a member of his employer's Final Salary Scheme, and whose transfer value from that scheme was over £200,000. This came as quite a shock to the client as his house was only worth £160,000! It just goes to show therefore that a pension can be a major asset of the marriage.

Over the last few years the Government has been considering methods of successfully splitting pensions between divorcing spouses, and up until quite recently, you had only two choices:

• Pension Offsetting: the spouse without the pension was awarded a higher proportion of the other assets as part of their settlement to offset the value of the pension
• Pension Earmarking: the Court could place an order on the pension scheme to pay a proportion of the benefits to the divorced spouse.

This latter option is a little complicated since it did mean that the spouses needed to keep in reasonable contact, and in certain circumstances if a divorced spouse remarried, then they lost their entitlement to their ex-partner's pension plan. There was also quite some confusion about how to cost the benefits and quantify them. For example, how do you quantify a death in service benefit (ie life assurance as part of the pension plan which a spouse would receive) unless the pension scheme member had already died? It was also quite complicated to quantify the actual value of the pension. Is it the transfer value, ie the discontinuance value of the plan converted into cash, or some future entitlement be taken into account as well?

In truth, both of these methods are open to quite a bit of interpretation and there are ways in which a skilled adviser can massage figures to benefit his client, whether he is acting on behalf of the Plaintiff or the Respondent.

The Government was also keen that spouses could be afforded a clean break. This would be possible using the offset method, but not as easy using the pension earmarking method.

Pension Sharing

Therefore as of 1 December 2000 it became possible to split the pension totally between the two parties (pension sharing). In the case of a Personal Pension Plan, the insurance company provides a transfer value and the divorcing spouse takes half of that money and invests it in a totally separate policy of their own. In the case of Final Salary Schemes, it would be possible to give the divorcing spouse their own entitlement under the scheme rules. For example, if the member was entitled to 10/60ths of the final salary, having worked for the company for 10 years, then the divorcing spouse could take 5/60ths worth of his/her pension and leave him/her with 5/60ths of his/her own. These would be held by the Trustee completely without reference between the spouses.

In effect though, most Final Salary Schemes (other than statutory schemes such as the Civil Service, Forces, NHS, etc) don't want to offer this option as it is an administrative headache for them and adds to the bureaucracy involved in Final Salary Schemes. They will therefore probably only offer transfer values to divorcing spouses whereby the capital value of half of the accrued pension is paid out for investment, for example in a Personal Pension Plan in the spouse's own name.

Civil Service schemes are different in that they do not have capital invested, and therefore don't have the liquidity to make transfer payments to divorcing spouses. They will more likely offer the first method giving the ex-spouse their own entitlement.

The Law Society still feels that the majority of divorces will settle by offsetting pension benefits against other assets of the marriage, as this is the simplest method available and tends to be more flexible for the divorcing spouse. Nonetheless, divorcing couples will need advice on how to quantify pensions properly and for this you need someone who knows his way round the various types of scheme on offer. An Independent Adviser can help you here, and can help you to make the necessary investments to ensure an income after divorce, or to help you re-build your pension if part of it has been transferred out to your spouse.

He can also help you to organise life assurance on your ex-partner to protect any maintenance payments, etc, if you have custody of the children. This is something that most people forget to do, and this can leave them in financial dire straights if their previous spouse dies and maintenance payments stop.

In conclusion, my message is that if you do find yourself having to get divorced, you should take advice from an Independent Financial Adviser who can help to assess, not only the value of the assets of the marriage, but also the true value of the pension schemes that each party has. The value of pension funds can be sizeable and if neglected, or improperly examined, divorcing spouses may lose out financially to quite a high degree.

In a recent newsletter, The Law Society advised solicitors to contact Financial Advisers for advice on how to split pensions in divorce cases as The Society felt that it's members were not sufficiently qualified to assist their clients in this area. I think this will emphasise the need for clear expert advice in this area.

I do hope that the majority of you reading this article will enjoy long and happy marriages, but if you do need advice, please do not hesitate to contact one of the IFAs listed here who can give you sympathetic and effective help.

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