Spotlight on pensions

By 14 August 2013FAQ, financial

The Office for National Statistics recently released data showing that divorce among the over 60s is increasing, despite the overall number of people getting divorced each year falling. There has been a 73% increase in divorced men over 60 since 1991, and a similar increase for women in the same age group. You can read the article here.

Part of this trend is simple demography – the population is aging and with more people over 60 there will inevitably be more divorces in that age group. In 1991 there were 404,000 divorced people aged 60 and over in England and Wales, a figure which increased three-fold to 1.3 million by 2010. As it becomes more common to be divorced, perhaps there is less of a stigma attached.

Another relevant factor may be the increasing financial independence of women, which means they may be better able to weather the financial implications of divorce. Employment of women has increased from 53% in 1971 to 66% in 2012. As a result women facing separation may well have built up their own pensions and still have an earning capacity to rely on in later years post-separation.

From the point where either spouse starts building up a pension, pensions become a major consideration in divorce. They are treated by the courts as an important marital resource in most cases, the value of which should be shared fairly when the marriage breaks down.

Alongside the family home, pensions can often be the biggest asset in a divorce, especially where they have been built up during a long marriage. Careful consideration must be given to how they are treated to provide fairly for both former spouses.

An early step is to find out what any pension is worth, a value known as its “cash equivalent value”. Any pension scheme member should get a yearly valuation, which is a good starting point but can often be lower than the fund’s true worth because of the way it is calculated, so sometimes it is worth getting an actuary to look in detail at the valuation to come up with a more accurate sum. It is also necessary to find out whether there are any restrictions on what can happen to the pension funds on divorce, so you know what your options are.

For older couples, where pensions are in payment, pensions may still have a cash equivalent value and be capable of being shared as a capital asset. Alternatively they can be treated as an income stream which could sustain a maintenance order in favour of the other spouse instead – but they can’t be both, as this would be double-counting.

There are main three ways in which pensions can be factored into a financial settlement.

When pensions are offset, one spouse keeps all or part of their pension in return for the other having a larger share of other assets, usually the family home.

Although this can be a superficially attractive way of sorting things out, particularly for any parent who wants to ensure that the children are not disrupted by a move, there can be problems with this approach. The fluctuating value of a pension cannot be equated with the bricks and mortar value of a house so a simple trade-off between pension and house can lead to unfairness – this, along with the fact that a pension is not usually immediately accessible, means that the value of the pension is usually discounted in a trade-off . This may seem like a good deal for the one who keeps the pension but you can’t live in a pension, often leading to problems for that person with rehousing in the meantime. Also, you can’t usually live off a house either, and the idea of downsizing to release money on retirement may not be realistic or sufficient when the time comes.

It is important to take specialist advice when considering an offsetting arrangement, so that you are able to balance the short-term attractiveness with the longer-term implications of any decision.

Another option is to “earmark” or “attach” part of the cash lump sum and/or monthly payments the pension holder will receive when he or she retires for the other spouse. The main disadvantage of earmarking is that if the pension policy holder dies before the recipient of the earmarking order, or before retirement, the benefit is lost, so earmarking only rarely tends to be used these days.

Because of the problems with offsetting and attaching pensions, pension sharing was introduced in 2000. Pension sharing works by splitting a pension between two spouses in whatever proportions are agreed or ordered to be fair. The non-pension-owning spouse carves out a specified percentage of any pension fund, which can then either form a new pension or be added to their existing pension fund, depending on the terms of the various schemes.

Calculating the appropriate percentage split of pensions is a complex exercise, and depending on the circumstances it is sometimes possible to argue that if part of the pension was built up before the marriage or after separation, that part should not be shared. The situation can be further complicated by international aspects within a case. The courts do not necessarily have power to deal with pensions held in another country.

Returning to the issue of the older couples who divorce, the correct treatment of their pensions , together with appropriate housing, is of fundamental importance. The importance of good financial advice cannot be overstated both in terms of general planning for funding life after divorce, and potentially in estate planning for the longer term.

Pensions can be complex beasts. We are happy to talk through with you any concerns or queries you might have about them. Please feel free to give Adam, Sue, Gail or Simon a call on 01223 443333.

 

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