Since the year 2000 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 and divorce
Pensions are complicated at the best of times but that doesn’t mean they shouldn’t be split fairly. Some solicitors and financial advisers don’t understand how they can be split and 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 What happens to the pension during divorce? Why you shouldn’t overlook the pension.
SAVVY TIP: The main points of the article are that the pension can be offset (which means that one partner gets a greater share of other assets, such as the house, instead of a chunk of the pension), an attachment order can be made (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 (called ‘pensions sharing’).
Steps to take
If your husband, wife or civil partner has a stock market linked pension (which could 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 pension (otherwise known as a ‘defined benefit’ pension scheme).
Step1: The pension should be valued.
It may be 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).
Step 2: 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.
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 may be better to try and split another asset rather than the pension, because if you split the pension you’ll lose some of its value because of the market value reduction that’s applied.
- 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.
- It may be worth delaying the split. 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 advisers say 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.
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