Don’t lose out on the pension when you get divorced; make sure you take advice.
It’s been over ten years since pensions were able to be split (or shared, as it’s called in the jargon) at divorce, but it’s likely that some women are losing out because they’re not getting the right advice. Pensions are complicated at the best of times and some solicitors and financial advisers don’t understand how they can be split and the consequences of getting it wrong. If your husband or civil partner has a large pension you could lose out by thousands of pounds if you don’t get the right advice.
How pensions can be divided
If you want to find out about the basics of how pensions can be split, read my article called why the pension shouldn’t be overlooked during divorce.
SAVVY TIP: The main points of the article are that the pension can be offset (which means that someone gets a greater share of other assets, such as the house, instead of a chunk of the pension), attached (which was previously called ‘earmarked’; it means that the pension isn’t divided until the person whose pension it is retires) or split at the time of divorce.
Steps to take
If your husband/civil partner has a stockmarket linked pension (so it can be a defined contribution pension provided by his/her employer, a stakeholder or personal pension) the process of assessing its value is much more straightforward than if it’s a final salary (otherwise known as ‘defined benefit’ scheme).
• The first step is for the pension to be valued. It’s called the ‘cash equivalent transfer value’ or CETV and it tells you – in broad terms - how much the pension is worth on a particular date.
SAVVY TIP: The person who is in the pension scheme has to ask for the cash equivalent transfer value but the other partner in the couple will find out how much the pension is worth once the Form E is disclosed (in England and Wales – the system is slightly different in Scotland).
• If it’s a final salary pension, the ‘cash equivalent transfer value’ can be harder to calculate. Because defined benefit pensions are based on the salary the scheme member earns when he/she retires or the average s/he has earned throughout their career it’s much harder to work out how much it’s worth at any one time.
SAVVY TIP: Depending on the size of the pension fund and who’s running the scheme it may be worth getting an independent valuation. Some pension schemes have had problems over the way they have valued pensions in divorce cases. “A good actuary should tell you if it’s worth carrying out an independent valuation of a final salary pension,” says Karen Ritchie, who’s an independent financial adviser with FPW and who has developed a specialist qualification for IFAs working in divorce cases (she’s also on SavvyWoman’s expert panel).
Why it can be complicated
If the pension that’s being divided is a defined contribution, stakeholder or personal pension, the main question is whether it should be split or whether it’s better to divide the value of something else (like the house) rather than split the pension.
• If the pension valuation is for a defined contribution/personal pension: ask if it’s invested in what’s called a ‘with profits’ fund, where the return you get is generated by bonuses added every year and at the end of the term. If it is invested in a with profits fund, ask if there is be an early surrender penalty applied called a market value reduction (MVR) or a market value adjustment (MVA).
SAVVY TIP: These penalties are normally applied for a specific length of time but they could significantly reduce the amount that’s left to divide. “If an MVR is being applied, it’s better to try and split another asset rather than the pension,” says Karen Ritchie. “If you split the pension you’ll lose some of its value because of the MVR.”
• If it’s a final salary/defined benefit pension. The scheme may be underfunded. This means there’s not enough money in the pension scheme to pay future pension commitments. This doesn’t mean that the pension scheme will have to close, but it does mean that it’s probably not the best time to split (or share) the pension.
SAVVY TIP: If you receive the pension information about your husband’s defined benefit scheme, ask if the pension scheme is underfunded and, if so, if the cash equivalent transfer values are being reduced to reflect this.
• If a defined benefit pension scheme is underfunded and is offering reduced transfer values as a result it has to let the scheme member’s spouse or civil partner join the pension until its fortunes improve and it’s properly funded. At that point you (as the ex wife of the scheme member) can be asked to leave the scheme.
SAVVY TIP: Independent financial adviser Karen Ritchie of FPW says that some pension schemes that are underfunded are denying that they have to offer a scheme member’s divorcing partner the right to join the pension (it’s called offering ‘internal membership’). It’s definitely worth challenging if the pension is underfunded and that's affecting the transfer values.
Getting divorced; what are the basic rules?
International divorce: what it can mean if you divorce outside the UK
Ask the expert: What do I do with my share of my husband's pension?
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