Retirement pot taken into account, says Alistair Mackie
WHEN couples separate with a view to divorce or the dissolution of their civil partnership, there can be a great deal of misunderstanding surrounding the subject of pensions.
As part of the separation process, there will in most cases require to be a division of a couple’s assets or “matrimonial property”. Pensions form part of the matrimonial property and are often the next most valuable asset after a couple’s home.
Separating clients may have little or no idea of the value of their own pension let alone their partner’s and not infrequently indicate that they will make no claim on their former partner’s pension. In many cases, that would be a mistake. Pension providers usually issue annual statements which show the amount of pension income which will be paid on retirement. Perhaps not surprisingly then, people think of pensions not in terms of value but in terms of future income. Annual pension statements rarely give the information which the law requires to be used in determining the value of a pension – the “cash equivalent transfer value” (CETV) of a pension is to be used when calculating the value of the matrimonial property. Pension providers are obliged to produce this valuation on request.
Pension benefits are transferable from one pension provider to another. The CETV is the amount which the existing pension provider would transfer to another pension provider if a transfer is requested.
Occupational pensions and personal pensions are treated in the same way when dividing the matrimonial property.
In general terms, matrimonial property consists of assets which have been acquired by a couple between the date of marriage and the date of separation and it is valued at the date of separation.
When a pension was in existence before marriage or civil partnership, the value has to be apportioned so that only the value attributable to the period of marriage is taken into account.
So, for example, if someone contributes towards a pension for five years before marriage and separates ten years after marriage, only two thirds of the value of their pension is taken into account.
All pensions have a value including those already in payment and Additional State Pensions (formerly SERPS).
Additional State Pensions should never be overlooked. Whilst for many people the value may be only a few thousand pounds, valuations can run to tens of thousands of pounds.
Once the appropriate pension value has been determined, the way it is dealt with will depend upon circumstances in every case. If there are other valuable assets and one party is liable to make a payment to the other in order to achieve a fair sharing of the matrimonial property, they may prefer to leave their pension intact and pay cash or transfer other assets to the required amount.
More commonly, however, cash will be required in order to finance the purchase of another home and in that situation there are a number of ways in which the pension can be used in order to achieve a fair sharing.
While it is not possible to take money out of a pension except on retirement or when converting a personal pension into an annuity or on pension draw down, it is possible, as already noted, to transfer benefits from one pension to another.
In some pension schemes, the transferred benefits must remain within the scheme so that the person who is to receive the benefits will become a member of that scheme, known as a “pension credit member”.
In other cases, pension benefits will be transferred into the other person’s occupational pension scheme or personal pension.
The result of a transfer of benefits is that the person making the transfer will have reduced the asset value of their pension so that unless the value transferred can be replaced, the amount of pension income which they will receive on retirement will be less. The person receiving the transfer of benefits will be able to receive a pension income or lump sum and income at whatever retirement age their pension allows.
Although there is provision within the law for a lump sum payable to a pension beneficiary on retirement to be earmarked for payment in whole or in part to another person, this has rarely been used in practice due to certain risk factors which this could involve. It might, however, be considered where someone was due to retire and receive their lump sum in the very near future.
While family lawyers can provide general advice in relation to these options, they are not qualified and therefore not permitted to provide investment advice and clients will be advised to seek specific advice from a financial adviser. In more complex cases, it may also be advisable to request a report from an actuary.
• Alistair Mackie is head of family law at Lindsays www.lindsays.co.uk