Newsletter

A new service for 2008. No long complicated explanations, you can email me for those! Just short notes covering situations about Pensions and Divorce, as I come across them.

1. Overseas Pensions – Cannot be shared or attached but can be offset, make sure scheme is truly offshore and not an onshore approved scheme with a funny name.

2. Overseas Divorce – Whilst overseas individuals can apply for a UK pension scheme share the court proceedings must be in the UK. If you go to Welfare Reform & Pensions Act 1999 section 22 you can see that overseas divorces can be dealt with in the UK by applying for Financial Relief in UK.

3. Safeguarded Rights – Contracting out benefits when shared become known as safeguarded rights with no access to benefits until age 60 with no tax-free cash being available. Until now! If clause 78 of the 2007 Pensions Bill becomes law, safeguarded rights will disappear allowing access to both cash and early pension. Great news.

4. Pension Protection Fund Sharing – Other clauses in the 2007 Pensions Bill deal with schemes in default, covered by the Pension Protection Fund, which can now be shared. A situation I doubt many of us have yet come across but one to put in the memory banks because all previous notes will say it is not possible to share such benefits.

5. Transfer Day Post Sharing Order – A great deal of misinformation and errors surround the final valuation post divorce. The transfer day is defined in law and is 21 days following the issue of any order. See attached article for more information.

6. Issuing A Sharing Order After Divorce – Section 24b of the Matrimonial Causes Act 1973 states “On granting a Decree of Divorce ….. or at any time thereafter…….., the court may, on an application …….. make one or more pension sharing orders…….”.

As always if you have a question, please do not hesitate to email and I will hopefully provide an answer as soon as possible.

7. Sharing a Pension Without Members Consent – Schedule 5 of The Welfare Reform and Pensions Act 1999 states that a pension sharing order can be implemented even without the members consent. An important point I have had to mention on more than one occasion.

8. Pension Schemes Without Sufficient Liquid Assets to Satisfy Order – All pension schemes can borrow up to 50% of their value. If there are still not sufficient liquid assets, the spouse receiving the credit could become a member of the scheme until such times as assets become available.

9. Sharing a Pension in Payment – This continues to cause problems. If the pension in question is in payment it does not mean that any credit will automatically be payable as a pension. The public sector unfunded schemes have various normal retirement ages from 60 to 65. Regardless of the age of the member who is receiving their pension, the spouse with the credit might well have to wait until 65 to receive an income. In all situations where the pension is in payment, no pension commencement lump sum, the new name for tax-free cash, is payable to the receiver of the pension credit.

10. Armed Forces Pensions – There is an excellent booklet providing details of all Armed Forces Pensions available on their website . If you click the heading “Booklets relating to …..” a booklet is available entitled “Pension Benefits on Divorce.”

http://www.mod.uk/DefenceInternet/AboutDefence/WhatWeDo/Personnel/Pensions/ArmedForcesPensions/

11. Sharing State 2nd Pension – State Earning Related Pension Scheme – I have been telephoned by the Department of Work & Pensions to be reprimanded! They say their notes insist that Legislation only provides for them to provide a share of S2P, where a previous transfer value calculation has been completed. I am still to be convinced, but if you are sharing S2P, obtain a valuation on form BR20 beforehand. The DWP did confirm that valuations using BR20 are available. It is only the forecast of benefits using BR19 that are delayed.

12. State Pension Age – Every woman under age 58 and man under age 50 is having their state retirement age changed. There is an excellent Pension Scheme Retirement Age calculator available via website www.thepensionservice.gov.uk/resourcecentre/statepensioncalc.asp.

13. Budget Calculator – Do your clients need to produce a list of expenditure? The FSA Budget Calculator website is a very useful basic tool that your clients might find useful in constructing a list:
http://www.moneymadeclear.fsa.gov.uk/tools/tools.html

14. Changing Values – With dramatic changes in stock markets, it is not only Money Purchase Schemes that can rise and fall. A Police Force CETV recently changed by 36% being £46,578 in less than 12 months. Caution your clients.

15. BP Pensions – Excellent website: https://pensionline.bp.com/content/pl

16. SERPS / State 2nd Pension – I don’t apologise for raising this again. A husband and wife recently produced combined CETV’s for SERPS of over £130,000, ignore at your peril. Form BR20 provides valuation.

17. Ownership of Order – I have come across several cases recently whereby pension sharing orders were issued by the Court but neither solicitor nor IFA involved took any action, all believing the other was dealing with the issue. It is vital that the order is tracked until final implementation has taken place.

18. Taking Cash Before Order – A recent case was disrupted because the husband took his tax-free cash without telling anyone, after CETV’s were provided to the pension expert. This did not come to light until orders were issued.

19. Falling Pension Values – The extreme investment market conditions are having a major impact on pension sharing issues. Normal pensions have seen values fall by 25% this month.

Final Salary Schemes - Due to the long lead time for actuaries to change their basis of calculation, CETV’s for final salary schemes are not changing too much, but not for long.

Money Purchase Schemes Including Personal Pensions – Values will be changing dramatically, even daily. When the recession arrives, investments linked to property could have significant problems with regards to liquidity.

How Will Cases Be Affected - If one party has a final salary scheme and the other party has personal pensions then any share previously agreed but not implemented will find that the money purchase values will have dropped significantly. An £82,000 CETV on the 7th January was revalued this week at £43,000. The party with the money purchase arrangement, whether larger or smaller than the final salary arrangement, will be disadvantaged. Consider a final salary CETV of £100,000 and a personal pension of £82,000. Sharing capital values requires a movement of £9,000. If that has been agreed but not implemented, then the person with the money purchase scheme, using the above examples, would have £9,000 added to their, now, £43,000 personal pension. Where the personal pension transfer values are £100,000 and the final salary transfer value is £82,000, a share again represented by £9,000 is required. If the CETV for the personal pension now drops to £50,000, the share has been agreed, implementation takes place and they still loose 9% of their £50,000 personal pension.

The Answer - There really isn’t one but it is vital that you warn clients of the potential disparity caused by the present markets and always make sure that up to date CETV’s are used. Requesting an additional final pension report as close to the pension sharing date as possible will help. This additional report, if only using different values, provided by the client, can be produced for £100 + Vat.

20. Safeguarded Rights - No longer exist. This means that contracted out benefits that are shared can be taken like any other pension, in the form of cash and/or income at any retirement age. This will apply to existing Safeguarded Rights as well as any future shares. Pensions Act 2008 Part 2 Sec 100.

21. Pension Protection Fund - The same Law now allows a share to be placed against a pension fund in default, which is administered by the Pension Protection Fund. Sharing of such a pension in the past was not possible. Pensions Act 2008 Part 3 Chapter 1 Sec 107….
22.Who is the Widow? - Not New Legislation, but I came across a Prudential Pension Annuity in payment recently, where the definition of a widow is the wife (now divorced) at the date the pension was taken out. In such a case, the best result was attachment not sharing.

23. C.E.T.V.s - I am sorry but this is not a Quickie. We have complicated new Laws and Regulations, which are going to cause significant problems in the area of transfer values and pension credits and create total uncertainty for final salary schemes.

Today GN 11 provides the compulsory process for calculating the cash equivalent transfer value. The vast majority of pension schemes do not provide any indication of what amount of pension credit they will provide for a former spouse until after the order has been made. This has always created uncertainty, however there was comfort in that GN 11 made provision for the benefit created in reverse for a pension credit should be calculated on the same basis as that used to calculate the cash equivalent transfer value for the benefit accumulated.

The New Laws and Regulations effectively create uncertainty. They do away with GN 11 and place the onus on the factors used in a transfer value calculation on the Trustees. We are seeing dramatic changes in the transfer values in one case doubling and in another case halving. These changes can happen between agreement prior to divorce and implementation of the pension sharing order. The consequences can be most dramatic and must be explained to both parties.

The real problem however is that in the past there was a degree of symmetry, that has now been done away with. The Trustees of the scheme can calculate the pension credit they will provide for a former spouse on the same basis as they would calculate the benefit they would provide for any other member for transferring in a value to the pension scheme. This calculation can be significantly different to the calculation in reverse for the cash equivalent transfer value for the member.

All reports, including my own, carry page after page of disclaimer. All experts hoping that the figures they produce are meaningful, useful and appropriate. Moving forward, where a pension scheme will provide no indication of the pension credit they will provide for a given share, we move into an area of complete unknown. The calculation of any estimated benefit for a given share has to be questioned, not only can it be dramatically wrong it could also dramatically change case by case and day by day.

A rather technical but excellent article is provided by David Salter, Joint National Head of Family Law of Mills & Reeve LLP in the December 2008 addition of Family Law under the heading “Pension Transfer Values: The New Regime”.

24. Armed Forces Pension Scheme – The old scheme known as AFPS75 insists any pension credit must remain in the scheme and for no benefit to be payable until age 65.

25. Armed Forces Pension Scheme 05 – A new Armed Forces Pension Scheme was introduced in 2005, AFPS05. Statutory Instrument 2009 No. 544 states for orders issued after 6th April 2009 the receiver of the pension credit can take benefits from age 55. For previous orders put in place for the 05 scheme, it is possible for the pension credit member to apply for benefits from age 55 on an actuarially reduced basis. Neither routes are yet available for credits in AFPS75.

26. NHS Pension Scheme Pension Credit – The provision by the NHS of the estimation of the pension credit they would provide following a particular share is working very well at a cost of around £40. The NHS require the date of birth of the spouse and an indication of a particular share to quote.

27. Abolition of Safeguarded Rights – The 2008 Pension Act did away with safeguarded rights but it is Statutory Instrument 2009 No. 598 that provides the instruction. The Statutory Instrument came into force on 6th April 2009. Safeguarded rights no longer exist and all the restrictions previously surrounding safeguarded rights have disappeared.

28. Ownership of Sharing Orders – Increasingly, problems are being encountered over who is issuing orders and then who is responsible for following through to ensure implementation. It is imperative that all involved agree responsibilities.

29. Minimum Retirement Age moves to 55 from 6th April 2010 - We all know how painfully long it can take from agreeing a pension share to it being implemented. I currently have 2 cases where it is important to the settlement that money is available from the pension schemes as soon as possible. In both cases the client is younger than 55 and I am having to warn them that if the pension share is not implemented by the 5th April 2010, then they will not have access to any benefits until their age 55.

30. Additional Voluntary Contributions - AVC’s – Under old Legislation AVC’s had a very specific meaning. Under new Pension Legislation the meaning is lost and the phrase is being used in a generic way. If you are looking to share the value built up in an AVC, always check with the pension scheme as to whether the order needs to be worded so that it includes the AVC or not. In some cases a separate order for the main scheme and AVC is required.

31. Subsequent Sharing - Section 24B of the Matrimonial Causes Act 1973 allows sharing orders to be issued at any time after divorce. They also allow a second share against an already shared pension but not for the person who received the first share.

Visit www.pensionsanddivorce.org for previous issues.

Regards

Richard Jacobs ACII

Richard Jacobs ACII
Resolution Accredited IFA Divorce Specialist