Archive | Pensions

Pensions and investments or how to turn Pensions into Porsches

Pensions into porsches Sam Jermy

GUEST POST FROM SAM JERMY

 

Turning Pensions into Porsches

I usually refrain from posting my reaction and opinion on a budget until at least a week has passed.  This provides some time to ponder and digest the detail; much of which only becomes clear post budget day.  In this blog post I will focus on the largely unexpected reforms being made to money purchase pension funds.

Over the week we have witnessed attention grabbing headlines such as describing the budget as the death knell for annuities. Lib Dem Steve Webb’s comments regarding his relaxed stance on people purchasing Lamborghinis with their pension funds has provided plenty of substance for debate. I now wait with nervous anticipation for marketing slogans such as “We Turn Pensions into Porsches”.

The proposed pension reform includes changes that were implemented from 27th March 2014.  These include a higher maximum income available from Capped Pension Drawdown, a lower Minimum Income Requirement for Flexible Drawdown and a higher lump sum figure available under Triviality Rules.  Ditching the technical terms, these changes basically mean.

People electing to drawdown their pension fund rather than buying an annuity will be able to take a higher annual income than that available previously.  For example, a 65 year old can draw a maximum of £8,850 p.a. from a fund of £100,000.  

People with secure pension income totalling at least £12,000 p.a. from sources such as the State Pension and a guaranteed annuity can now elect to have full flexibility on how much they draw from an invested pension fund.  

Pension benefits can be withdrawn from age 60 as a lump sum for funds totalling £30,000; individual pension pots can be withdrawn as a lump sum for pension pot values up to £10,000.

As is typically the case with pensions, the above rules are all subject to complex qualification rules, commencement dates and restrictions.  Professional advice should be sought before any action is taken.

The more dramatic changes to pensions will take place from April 2015.  From this point, people over 55 years of age will have full flexibility in how much they drawdown from their invested pension funds and will not be subject to the above limits and restrictions.  Note, the minimum pension age is proposed to increase to 57 in 2028.  Whilst in theory a full drawdown seems attractive, the tax implications of large one-off withdrawals may make it less so.  With only up to 25% of the withdrawal being free of tax, it is important to take into account marginal tax rates and any potential loss of personal allowances. 

This future flexibility for pensions and investments has led to a fierce debate as to whether people can be trusted not to blow their pension pots in one go.  The government’s stance is relaxed on this point as the introduction of the single-tier state pension is broadly at the level for means-tested benefits. Squandering a personal pension fund should not provide people with the means to claim additional state benefits. This does seem like an odd stance considering the government’s drive behind encouraging personal and workplace pension provision.

I do provide financial planning guidance to clients who have accumulated pension funds that are surplus to their lifetime income requirements.  They are a small minority however. The vast majority of my clients are greatly dependent upon their pension funds to support their basic spending needs and lifestyle aspirations.  Financial security during their retirement years is the key priority for most. For this reason, annuities should still have their place as they can offer guaranteed income levels for life.  That said, I would expect to see significant innovation in the annuity market and increased competition to win annuity business. All positive news for the consumer.

There has also been talk of a ‘Buy to Let’ bonanza fuelled by people fully withdrawing their pension funds and investing into property.  Again, what seems like a good idea in theory, in practice, may not be so.  The tax liability on pension withdrawals, property purchases (Stamp Duty Land Tax) and the tax on rental income may result in a less than attractive overall net rental yield.  The numbers need to be fully ‘crunched’ to determine the suitability and benefits of this option. 

Other considerations include the pros and cons of holding investments within ISAs vs. Pensions. Watch this space for the next blog on this specific subject and have a look at my previous post on Divorce Finance Toolkit on the subject of state pension changes.

The implemented pension changes and forthcoming reform gives people greater flexibility to make their own choices regarding when and how to draw their invested pensions. With so many variables at play such as tax, investment risk, inflation risk and liquidity; planning becomes essential. A qualified financial planner can provide guidance and assistance to help people make informed decisions and achieve financial security in retirement.

 
Sam Jermy works for Family Law Financial Planning Ltd which is an appointed representative of North Laine Financial Management Ltd which is authorised and regulated by the Financial Conduct Authority. North Laine Financial Management Ltd’s FCA Register number is 446522.  The views expressed in this guest post are Sam’s own. Please contact your own independent financial adviser or family lawyer if you believe the issues raised by Sam impact upon you. Alternatively, please post a comment or query below and Sam will do his best to respond.

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State pension: why it will matter on divorce

Sam Jermy Family Law Financial Planning state pension on divorce

GUEST BLOG: Sam Jermy of Family Law Financial Planning

 

 

State Pension Reform

In January of this year, a radical reform of the state pension was unveiled. The proposed reforms will affect millions, many of whom will be worse off under the new scheme.

Changes to occupational and public sector pension schemes often evoke significant backlash and protest. In some cases it has led to national strikes. The response to the proposed state pension reform in contrast has been pretty subdued. One could even say non-existent. So why such a passive response to significant reform? Well, I have a theory:

    1. The majority of us have absolutely no idea what our state pension is worth to us or when it will be paid.
    2. A common perception is that the state pension is likely to be worth very little to us.
    3. For many, retirement seems a long way off. We have enough to worry about in the present

I believe these factors go a long way to explain why pensions and more specifically the state pension often receive little focus in divorce proceedings.

Let’s actually consider what the state pension could be worth to you. Under the new scheme, a full state pension entitlement would be worth £144 in today’s money. If we assume that these payments retain their inflation proofing and consider that they could be paid for say 35 years. On these assumptions, a total of £262,080 would be paid in today’s terms. When viewed in this way, the dull old state pension suddenly seems a little more interesting.

State pension proposals

The Department for Work & Pensions proposal document, “The single-tier pension: a simple foundation for saving”, lays out the detail of the reforms. It is a joyful read at 108 pages. I have summarised the key points below.

      • The reforms will not take effect until April 2017 at the earliest.
      • For those that reach state pension age before implementation of the reforms, they will retain their existing entitlements and benefits.
      • The existing complicated structure of a basic and various additional state pension entitlements will be replaced with a single tier pension
      • For those reaching state pension age after implementation of the reforms, their existing National Insurance records will be translated into a “Foundation Amount”. This Foundation Amount in effect provides a level of entitlement to the new single tier pension. Further entitlement can be built up in the future.
      • The full new single tier state pension is likely to be £144 per week. This amount is likely to be uprated by the highest of growth in prices, average earnings or 2.5%.
      • Individuals will need 35 qualifying years of National Insurance Contributions or credits for the full pension amount.
      • Individuals will require a minimum of 7-10 years to start to qualify for a proportion of state pension.
      • There will be no facility to inherit state pension rights or derive them from a spouse or civil partner (subject to transitional provisions).

The devil in the state pension detail

As usual the devil is in the detail. For the purposes of this post, I would like to focus in on the implications of the reforms for divorce.

The present system facilitates the following:

  • If a person on divorce does not have a full National Insurance contribution record up until that time (currently 30 years), they may apply to substitute the National Insurance record of their former spouse for their own record in relation to all tax years during their working life. They can do so up to the end of the tax year in which the marriage ended or the end of the tax year before they reach State Pension Age (SPA), whichever comes first. This process is referred to as Pension Substitution and is a benefit which needs to be claimed rather than being granted automatically. If the ex spouse subsequently remarries they will lose the benefit of any Pension Substitution top up, unless the remarriage occurs after their State Pension has already come into payment.
  • Any additional state pension entitlement can be taken into account as a financial asset on divorce. This means that part of the value of any additional state pension you have earned could be shared with a former husband, wife or civil partner.

Following the implementation of the proposed reforms, the situation fundamentally changes.

  • It will not be possible to claim pension substitution
  • It will not be possible to share any additional state pension entitlement

The proposal document states:

“The single-tier pension has been designed to ensure that the large majority of individuals will be able to get the full rate in their own right. In steady state, there will be no rationale for allowing people to inherit or derive state pension income based on the National Insurance record of their spouse or civil partner”.

What now for pension sharing orders?

So what does this mean for those divorcing now or in the future? In my mind the following points are relevant.

  • Any pension sharing orders already in place prior to implementation will be honoured. This places a deadline (likely to be April 2017) on getting additional state pension sharing orders in place.
  • In order to qualify for a full state pension following implementation of reforms, it will be necessary to have 35 years of contribution history/credit in your own right
  • Post implementation, divorce lawyers will need to examine the disparity between the state pension entitlement of a husband and wife and consider how this should be taken into account. The disparity may become a more significant factor in the absence of pension substitution
  • It is vital for people to quantify their state pension entitlement and the contribution this makes to their future financial security

A professional financial planner will be able to incorporate an individual’s state pension benefits into a cash flow forecast. By combining state pension benefits with other income and assets, a cash flow forecast can provide important insight into future financial security and needs.

In the absence of additional state pension sharing and substitution, it will become more important than ever to consider future income needs in retirement.

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Sam Jermy works for Family Law Financial Planning Ltd which is an appointed representative of North Laine Financial Management Ltd which is authorised and regulated by the Financial Conduct Authority. North Laine Financial Management Ltd’s FCA Register number is 446522.  The views expressed in this guest post are Sam’s own. Please contact your own independent financial adviser or family lawyer if you believe the issues raised by Sam impact upon you. Alternatively, please post a comment or query below and Sam will do his best to respond.

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Pension planning on divorce

pension planning on divorce needs financial planning

Divorce and pension planning

Pension planning on divorce is crucial.  After the matrimonial home, the asset of greatest value accrued during any marriage is likely to be the pension pot.

One of the challenges for a family lawyer is to explain to a client, especially a wife, why she should not ignore her lack of pension provision during divorce proceedings. Understandably, most clients’ priority is the welfare of the kids.  Or keeping the family home.  But once a divorce is obtained, it is imperative that the family lawyer has imported expert advice for pension planning on divorce for the client.  There are three main outcomes to this pension planning:

  • Pension offsetting.  This is where the pensions are valued but are not subjected to pension sharing or pension attachment.  So, for example, the wife may decide to keep a cash investment saved elsewhere during the marriage but leave the husband’s pension untouched.
  • Pension sharing order.  This is where a specific pension fund, or a number of funds, are split, along percentage lines.  So for example, the husband’s pension fund with Many a Muckle Assurance Ltd worth £100,000, is split so as to give the Wife 40% of the fund value.  The details are drawn up on a pension sharing annex and attached to the family court’s financial order on divorce.  The pension is split reasonably quickly, once the pension trustees have had time to implement the order (they have 4 months, in fact).  You can’t actually get your hands on the money, of course, it is hived off to create your own pension fund ready for your retirement.
  • Pension attachment order.  The pension fund is not split.  Instead an order specifies that a proportion of the pension fund’s benefit, when it pays out at the husband’s retirement, is paid to the wife.  Beware: the order dies with the husband so the income is lost to the wife. Ditto if she remarries.  This is only used by lawyers in pension planning on divorce in very specific circumstances.

I still come across cases where lawyers have neglected to pay enough attention to pension planning.  By way of example, they have neglected to obtain a value for the Additional State Pension for their client or the spouse on the other side.  You only need the modest little BR20 form to get this value.   Or they accept a pension scheme fund valuation for a final salary scheme instead of importing expert assistance to test the assumptions used in the valuation given.  The difference can run into tens of thousand of pounds.

But it is not just being savvy enough as a family lawyer to realise the valuation issues arising in pension planning on divorce.  The benefit, it seems to me, of making sure financial planning advice is obtained for a client is that they are guided on two key areas:

  • The need to continue to contribute to a pension fund after divorce – this is crucial.
  • The need for cash flow modelling from a financial planner during the divorce negotiations so that a specific income need allowing for pension payments after divorce is secured in a maintenance order before the divorce is finalised.

I brushed the dust off this post on pension planning (I have at least 10 draft posts lurking in the wings) when I read about recent research by the Phoenix Group on pension provision for women after divorce.  Some of the conclusions are worrying:

 

    • One in three divorced women don’t save any money at all
    • A staggering two in five (38%) have no idea what settlement they received after their divorce
    • Only 6% received pensions sharing order or a pension earmarking order 

All in all, this just reinforces the need for family lawyers to insist upon seeking pension planning advice on divorce for their clients.  Leaving it until after the divorce is simply too late.

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Financial planning in family law cases

 

Family lawyers should import financial planning

Family lawyers should import financial planning advice

I still surprise some of my clients, sitting in front of me with a pressing need for legal advice on a family law matter, when I take an avid interest in the identity of their other professional advisers and enquire about the financial planning that I expect to see in place.  I suppose they expect me to launch into questions about unreasonable behaviour or compromising comments on their spouse’s Facebook timeline.

I’m always surprised that they are surprised.  I wouldn’t dream of dealing with, say, a client who is facing divorce proceedings who owns a business, without talking to his or her accountant or financial planner.  I will want to understand how the business, and the family unit, ticks and how both may be affected by the advice I will be offering.

As a family lawyer dealing with divorce, civil partnership or separation issues I always have one eye on the financial planning issues that will arise in a case.  When I refer to financial planning, I do not mean sitting down with a divorce client and simply subtracting the outstanding mortgage from the value of the matrimonial home to work out the net equity.  No, I mean something much more sophisticated and, in general terms, beyond the skill set (and regulatory authority) of lawyers.

I will set out just a few examples.

Financial planning in divorce and civil partnership dissolution

With the exception of the most straightforward of divorce cases, perhaps one where there are no children or little or no assets, I would look to import financial planning advice for my clients.  The following scenarios are familiar ones:

  • The family home may need to be sold but this will involve exploring realistically the mortgage capacity of each spouse.  How much can be borrowed and what would be taken into account by a mortgage lender as income?  Will bonuses count?  If a wife is to receive maintenance payments from her husband after divorce, will this count as income in her name and improve her ability to obtain a mortgage advance?  
  • How much money will there be to live on: now, in five years’ time, or at retirement?  When family lawyers sit down with their clients to complete financial disclosure they need to detail all the outgoings their client will face.  Speaking frankly, for most lawyers, this has always been a bit of a chore.  There’s nothing exciting about working out utility costs or the public transport costs for your client to get to her new job.  Where’s the law in that?  So it tended to be done in a pretty slapdash way.  But this exercise is crucial.  The outcome impacts directly upon your client’s quality of life after divorce. It deserves some time and attention.  Financial planners use fairly sophisticated cash flow software that models the fluctuations in income and outgoings for clients over a long period of time.  In other words, they properly plan for the future.  This data is invaluable for the family lawyer who wants to negotiate the best outcome for their client in any divorce settlement.
  • Never mind the family home, what about the pensions?  How many times have I had a client say to me: “My husband says it’s not worth bringing pensions into it. We should ignore them”.  It is surprising how often pensions appear to be ignored.  I don’t ignore them.  I have them valued and then I decide whether they can be ‘ignored’.  Pension valuation can be difficult.  And let me make one thing clear.  £100 of pension funds for a female client is not the same as £100 for a male client.  You see, women live longer (just have a look at the figures kept by the Office for National Statistics).  So that £100 for a woman has to stretch further.  In simple terms, it will not yield as much income in retirement.  And here is another common refrain: “My husband says we should split the pensions in half.  That’s fair”.  Well it’s sounds fair, but it probably won’t be in the long run.  Any family lawyer who fails to obtain advice from an appropriate expert, such as a financial planner, with the relevant pension expertise, is selling their client short.
  • Maintenance payments for a spouse or children may have been agreed.  But what happens if the payer of maintenance dies?  I don’t understand why more lawyers don’t obtain advice for their clients on cost-effective insurance policies to pay out in the event of death.  This solves any cash flow problems for the ex-partner who would otherwise struggle with the financial burden of any children of the marriage.  And it also helps to prevent claims against the estate of the deceased under the Inheritance (Provision for Family and Dependants) Act 1975.

Financial planning for cohabitants

  •  The law in England and Wales does not provide adequate protection for couples who have cohabited, in some cases, for many years, and even had children.  Living Together Agreements can provide a sensible financial planning exercise for the relationship ahead.  It is particularly important where property may only be owned by one party or there is a common purchase but with unequal monetary contributions.  It is crucial for Wills to be put in place if proper provision is to be made for the other partner.  It is also possible to put in place nominations for death benefits under certain pension entitlements.  Life insurance, again, can become a sensible step to take to ensure that untimely death does not leave partners or children in the lurch.

I am fortunate in my day job as I can call upon my colleague, Sam Jermy, a financial planner, to help my clients.  The need to import financial planning advice is so integral to the family legal work that my firm undertakes that we formed a joint venture with a firm of chartered financial planners.  A free initial consultation is perfect to identify the issues that I need to concentrate on in obtaining the best outcome for my clients.  I appreciate that not everyone has access to a chartered financial planner.  But, if you find yourself encountering some of the issues raised in this blog post, ask your lawyer if financial planning advice is needed.  Don’t leave it until the doorstep of the court or the drawing up of the negotiated settlement – an opportunity for prudent and informed financial planning will have been missed.

STOP PRESS: I’m pleased to announce that Sam Jermy, a financial planner with Family Law Financial Planning, has offered some guest blog posts on the financial planning  work he conducts with family law clients.  In keeping with the vast Divorce Finance Toolkit budget at my disposal I have agreed a package of chocolate digestives and tea for Sam’s blogging contribution.  If I judge his blog posts to be particularly helpful for my readers I will even let him dunk the biscuits.  Watch this space.

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Separation no bar to divorce finance claims

Separation

Separate but not apart in absence of divorce

Any divorce lawyer will tell you that it is better to obtain advice about an appropriate financial settlement upon divorce than simply let things drift.  People’s lives move on, sometimes for the better, sometimes for the worse, but any delay of years can usually make it harder to sort out (never mind agree) an appropriate settlement.  Even when ex-husbands and wives are trying to negotiate financial claims many years after the separation they can get a nasty surprise to learn that the family court will value assets at today’s prices, not six or seven years ago if that happened to be the date of divorce or separation.

My postbag has a plea from Tina:

I left my husband six years ago, and have been living with a new partner.  I never divorced. I am on the bread line – used all my life savings to help support my new partner, even bought him 3 cars.  I’ve no income at all.  My new partner’s on very low income.  We live in rented house, and new partner is talking about leaving me now. I’ve no security. My husband still has his own business, and promised inheritance from his uncle. Could i be eligible for sposal maintenance? My husband was also left his mum’s house, which i didn’t get a penny from. Plus I’ve no pension, and I’m 52.  I had a heart op two years ago. Thank you.

There is so much about Tina’s situation that I do not know about.  Readers of my blog will know that the devil is always in the detail when it comes to the family’s court’s jurisdiction which takes all circumstances into account.  As usual, because I cannot and do not offer advice on my blog, I can only make some observations about Tina’s desperate situation:

  • I do not know the length of the marriage .  The longer the marriage, the more likely the presumption of the court to consider it reasonable for Tina’s husband to make financial provision for her, despite the significant period of separation;
  • I do not know whether Tina raised children with her husband during the marriage: is Tina’s lack of pension provision because she was busy bringing up the children?  A factor that would weigh heavily with the court.
  • When did Tina’s husband receive his mother’s house?  I presume this was an inheritance?  The inheritance is likely to be significant, especially if Tina and her husband already owned their own property and the mother’s house is a surplus asset.
  • Tina’s health is not good at the moment and she does not appear to have any earned income.  Her health may severely limit her ability to get paid work.  This would concern the family court.
  • There is mention of the husband’s business.  Was this a business he had during the marriage?  Was it a company and did Tina have any formal interest in the business, such as a shareholding?  Did Tina make an indirect contribution to the value of the business by dint of the marriage?  This business could be hugely significant in any divorce but I don’t have any information.
  • Tina mentions the ‘promised inheritance’ from the husband’s uncle.  This is only a promise and the uncle could change his Will at any time.
  • Unless there are very valuable assets in the marriage, it is likely that a court would deal with a financial settlement on the basis of ‘needs’.  This means that a court may compel Tina’s husband to use any assets he may have built up after Tina left him to satisfy Tina’s financial claims in divorce.  The husband’s inheritance from his mother may also have to be partially used.
  • Tina and her husband are not divorced.  There has not been a financial order from the court.  Tina has not re-married.  This means that the financial claims: property adjustment, lump sum orders, spousal maintenance, and pension sharing orders, are all still open to Tina.
  • Although Tina has been co-habiting with her new partner for six years, this does not have the same weight as a marriage in the eyes of the family court.  In any event, Tina seems to have spent her life savings supporting this man so he can hardly be viewed as a valuable resource to Tina whose existence should prevent her from reaching a divorce settlement with her husband.
  • Tina may well want to go and obtain advice immediately from a family law solicitor who offers legal aid before that scheme dries up  in April 2013.  The solicitor can advise upon initiating a divorce and also a financial settlement and may also want to explore how Tina’s housing situation can be secured should her present partner leave her.  Is the rent paid to a private landlord or to a local authority or housing association?  Steps may be taken under the Family Law Act 1996 to prevent Tina’s partner from relinquishing the tenancy and therefore making Tina homeless.
  • I doubt Tina can take any further steps against her present partner for the monies she has spent on him.  As co-habitees, neither has any financial responsibilities to the other.
  • Tina may also wish to consider booking an appointment with her local CAB to have her situation assessed by a welfare rights benefits adviser, particularly in view of her health.
I hope my observations are helpful and I wish Tina well.


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Video: How to request a pension valuation on divorce

Completing Form E within divorce proceedings is difficult enough but one of the main mistakes is to underestimate the length of time it takes for pension providers to cough up the pension information.  But in the first place, it helps to submit the correct document: this is Form P (Pension Inquiry) to each pension fund holder. Using Form P is essential, otherwise the pension providers will not know the context of your request is a divorce and therefore will not give you the information needed for Form E.

Here is a short video on:

  • how to find the Form P for free on the internet;
  • the relationship between Form E and Form P;
  • how to complete Form P.

Form P is essentially used for the majority of private pension funds.  A different pension information request form is used if you are, for instance, in the armed services,  a police officer or a teacher.  As ever, I can always post on these exceptional circumstances if there is enough interest.

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Pension Service delays for divorce calculations

Pension computer says 'No'

Almost invariably, when consulting a family divorce lawyer, you will be told that pension sharing may be an option in your financial settlement.  You will asked to obtain the capital value of your pension fund which may be a private pension, a company pension scheme or public sector pension.

What can be forgotten is that the capital value of a State Second Pension (S2P), also called an Additional State Pension should be obtained.  It has, in my experience, been overlooked by lawyers who should know better.  If a spouse has not contracted out of the old style SERPS scheme and put their NI contributions into a private, personal pension then the value of the State Second Pension may be very tidy indeed.  Especially someone who may have had a working life of 30 plus years on a full-time basis.  This fund can also be split or at least taken into account when dealing with other capital assets in a marriage.

Delay

Well, after the recent delays in obtaining pension capital values for public sector pensions, I am now receiving letters from the Pension Service telling me that computer upgrades are going to cause a delay in the production of the information needed for the State Second Pension valuation.

Unfortunately, the letters do not tell me or my clients how long we may have to wait.

If anyone from the Pensions Service happens to read this blog post please feel free to let me know if you have any idea how long the delay will be.  And don’t say it’s like a piece of string…

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Maintenance on divorce: RPI… RIP?

RPI/CPI Comparison 2009 to 2011

Divorce maintenance payments: CPI or RPI

I have written before about whether maintenance payments for spouses and child support on divorce should be inflation-proofed by automatically increasing their value by any rise in the Retail Prices Index (RPI).  I pondered whether such a link could be made instead to the lower figure of the Consumer Prices Index (CPI).  I noted the Government’s quiet adoption of the CPI for the payment of benefits as a way of saving money in real terms.

Divorce solicitors will usually seek to protect the value of their client’s maintenance payments by linking future increases to the RPI.  However, the mass strike by public servants on 30th November this year (in part because their pensions are now subject to the lower CPI link) demonstrates that these policy decisions matter.  Likewise, a client who is awarded maintenance linked to the CPI over 15 years is going to be significantly disadvantaged in comparison to the client whose payments are linked to the RPI.

Rise of the CPI?

Surely this just means that solicitors should demand that the link is to the RPI?   After all, that’s the way it’s  always been, isn’t it?  So, it must be set in stone?  Perhaps no longer. The High Court today decided, in the face of a legal challenge by trade unions, that the Government’s linking of public sector pensions to the lower CPI figure was lawful.  Lord Justice Elias stated, in his judgement:

“The use of RPI has in the past been merely current practice.  Looked at objectively it could not properly be asserted therefore that any promise of its continued use had to be assumed”.

Personally, my view is that a link to the RPI for maintenance payments would still be appropriate since this is an inflation measure that includes the cost of housing (which the CPI excludes).  I cannot imagine many clients thanking their solicitors for securing a link to the ‘poor cousin’ CPI inflation measure.  But, as Lord Justice Elias demonstrated today, in these more economically austere times,  old assumptions may no longer hold true.

 

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Public sector pension sharing palaver

Pension Inquiry Form

Pensions? How Boring…

Tell that to the thousands of public sector workers marching past my office window in Brighton today telling Mr Osbourne that they do not want to work longer for much smaller pensions.  They seemed very excited about it all.  As a divorce finance solicitor I get very exercised about pensions, especially when it comes to carving them up during a divorce.

As most readers of this blog will be aware by now, it is possible within the financial proceedings arising out of divorce or civil partnership dissolution to split a pension fund.  But first, you have to obtain a value of the pension fund, what is called the capital equivalent value – CEV –  (or capital benefit value if the pension is in payment). This is obtained from the pension provider by submitting a Pension Inquiry Form.

The Government, in its March 2011 Budget, announced that they would be devising a new valuation basis for public sector pension schemes.

HM Treasury then released a Guidance Document in October that requires all Public Sector schemes to use a different discount rate for determining Cash Equivalent Transfer Values. So far, so boring, right?

Oh, bugger…

Problem is, the public sector schemes have responded by pressing the pause button on CEV calculations because they first have to change their systems to work out the new values.   The knock on effect has seen the implementation of the Pension Sharing Orders (PSO’s) stuck, apparently like the late Walt Disney, in suspended, deep-frozen animation.

The change in the valuation basis has no impact on private sector pensions or state pensions.  There is no impact where the divorce settlement is to be based on ear-marking or an offset approach using independent, actuarially calculated Capital Values of the pensions.

Pity the poor divorce lawyers up and down the land trying to get valuations for these public sector schemes in order that their clients can comply with their disclosure obligations to the court.  Our old friend, the (dreaded) Form E (financial questionnaire) demands the CEV figure and won’t settle for anything less.

So, I have to wait then?

Yes.  If you have just been ordered by the Court to produce a CEV figure on your Form E, then your solicitors should append the last available valuation but make it clear that they are awaiting the revised valuation and it will be forwarded to the court and sent to the other spouse as soon as it is available.  A good divorce finance solicitor will be able to obtain independent financial advice for their clients on whether it may be possible to consider an alternative settlement that could involve  a full or partial offset approach.  That is, offer your spouse a cash lump sum to keep his or her hands off one of your pension funds. But you need specialist financial advice if you are considering this route rather than wait for the public sector pension scheme administrators to get their act together.  Don’t forget to ask your solicitor to discuss with your financial adviser the application of a discount on the cash lump sum you should pay (after all, cash in the hand is better than a bird in the bush – if you get my meaning).

But you may be advised to obtain a new valuation under the revised rules, even if there has already been an agreed percentage split in your pension fund.  If the court has not approved the settlement yet, it is arguable that the new valuation should be obtained so the true impact of the pension sharing order can be ascertained by the judge.  I would even suggest that advice should be sought in circumstances where the court has approved the PSO but it has not yet been implemented.  If the difference in the CEV figures before the Government’s guidance paper was issued in October 2011 and after is significant, then legal advice should be sought as to whether the basis of the original PSO has been undermined by the change and whether an appeal (which would normally be out of time) should be sought. 


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Don’t forget the State pensions

I would hope that most couples facing divorce or civil partnership dissolution would understand the importance of private pension assets (and the possibility of a pension split) in the overall capital settlement.  I find a surprising number of potential clients have not considered the value of state pensions.  It does not hurt to obtain a state retirement pension forecast  and capital value if getting divorced for a number of reasons:

  1. Your financial position at the point of retirement (which may be closer than you think) may not be as good as you would hope, especially if you are a woman who has had a number of career breaks to bring up children.  You can obtain a state retirement forecast using BR19.
  2. If you are considering a financial settlement that will include a pension share, your solicitors will want your independent financial advisers to have up-to-date information especially if there is going to be an attempt to equalise pension incomes for both spouses at the point of retirement.
  3. The capital value of a State Second Pension (S2P) may be greater than anticipated and in the course of a long marriage, it would be advisable for the solicitors to the parties to obtain a value for this pension fund.  If you are involved in proceedings then it is a requirement of the financial disclosure forms (Form E) that you or your advisers attach a valuation to the form before you send it to the Court.  You can use Form BR20 to ask for the value of the capital fund held by the State on your behalf.

If in doubt, submit the forms, or ask your advisers if they are required.

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