Jan 15
Pensions and Divorce A recent case in the financial press highlighted the importance of obtaining specialist advice when considering the part that pension entitlements may play in a divorce settlement*. In this particular case, a divorce lawyer dividing up assets between a husband and wife did not obtain a valuation of benefit entitlement from the scheme and performed an incorrect calculation on the wife’s National Health Service pension. The clients’ lawyer based the value of the wife’s pension benefits on the cash lump sum she would receive and multiplied it by four, on the basis that pension funds allow 25 per cent of the total fund value to be taken as tax free cash. As a result, the wife’s pension entitlement was vastly undervalued and the pension sharing order awarded an overly generous percentage to the husband. It may now be necessary to see if the pension sharing order can be amended, resulting in a delay and additional expense. When looking at the assets of a marriage, pensions should, of course, be included. Generally speaking, it is often best advice for each party to retain their pension rights on divorce and instead share the value of another asset such as the house or an investment portfolio.
If pensions need to be shared, expert advice is needed to obtain and interpret the valuation received from the pension provider. For final salary (defined benefit) schemes, there are a number of potential issues, including: Whether discretionary benefits are excluded from the calculation. In this case the ex-spouse might argue that this is not a fair value especially if the scheme’s practice has always been to pay these discretionary benefits. The Cash Equivalent Transfer Value (CETV) provided for an early leaver from a final salary occupational scheme is less than ideal when used to provide a divorce valuation for an active member of a final salary scheme. The CETV is based on the member’s service to the date of leaving and allows for any required revaluation to the member’s benefits from that date to their retirement date. This may be seen as inappropriate where it is anticipated that the member’s earnings will increase more rapidly than the revaluation rate, or where scheme benefits are expected to be enhanced in the future.