PENSIONS & DIVORCE LOOK BEFORE YOU LEAP

PENSIONS & DIVORCE OBJECTIVES

By the end of this session, attendees will be able to:

• Understand the divorce process and the options available for pensions in a divorce settlement

• Explain the relative advantages and disadvantages of the divorce settlement options to clients

• Understand the impact of pension freedoms on divorce settlements and describe the practical issues in relation to a pension sharing order

PENSIONS & DIVORCE DISCLAIMERS

No conflict of interest

Divorcees are subject to English Law…

One party has the larger pension assets…

And that it’s always the bloke’s fault in an opposite sex marriage…

We will assume:

PART 1 BACKGROUND

PENSIONS & DIVORCE

PENSIONS AND DIVORCE BACKGROUND

Number of opposite sex couples divorcing: On petition of/Party to whom granted, all decrees

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

1992 1997 2002 2007 2012 2017

Total Husband Wife

Source: ONS, Divorces in England and Wales, September 2018

PENSIONS AND DIVORCE BACKGROUND

Divorces of opposite sex couples: Men and Women age 60 and over

02000400060008000

1000012000140001600018000

1992 1997 2002 2007 2012 2017

Source: ONS, Divorces in England and Wales, September 2018

PENSIONS AND DIVORCE BACKGROUND

Marital status by age group and sex, England & Wales, 2002 to 2017. Divorced over age 65, all persons

0

200000

400000

600000

800000

1000000

1200000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: ONS, Population estimates by marital status and living arrangements England and Wales, July 2018

PENSIONS & DIVORCE BACKGROUND

Griffiths v Dawson & Co (1993) • Dawson & Co failed to include pension assets

• Mrs Griffiths successfully sued her lawyer

• Pensions Act 1995 – pensions must be

included when assessing assets

Source: Revenue law – Griffiths v Dawson & Co

PART 2 PENSION OPTIONS

PENSIONS & DIVORCE

PENSIONS & DIVORCE

3 stages:

ACTION POINTS

Find the pensions 1 2 3

Value the pensions

Decide how to split the pensions

PENSIONS & DIVORCE

Factfind

• Assets, liabilities and income for both parties

• Schedule of Assets drawn up by solicitors

• Full disclosure can be ordered by the Court

• Once agreed, Minute of Agreement lodged with Court, registered and becomes legally binding

1. FIND THE PENSIONS 1

PENSIONS & DIVORCE

Cash Equivalent Value (CEV)

• Defined Contribution

› CEV = Fund Value

• Defined Benefit

› CEV calculated by Scheme Actuary

2. VALUING THE PENSION(S)

Exit charge ? GARs? Loyalty Bonus?

Subject to assumptions…

2

PENSIONS & DIVORCE DEFINED BENEFIT - CALCULATING THE CEV

Basic pension

Project to SRA

Cost of pension at

SRA Cost today

e.g. 60ths Revaluation

factor Annuity

factor Discount

factor

Fixed: scheme

rules

Statutory: CPI/RPI

Interest/ Mortality/ Expenses

Actuarial discretion

DEFINED BENEFIT CALCULATING THE CEV

(10/60 x 50,000 x (1+RR)^20 x (1/(1+DR))^20)/AR RPI Annuity Discount CEV

2.5% 2.86% 7.00% £123,383

2.5% 2.86% 6.00% £148,872

2.5% 2.166% 7.00% £162,915

2.5% 2.166% 6.00% £196,571

Example

• Male, aged 45, salary £50,000, 10 years’ service, NRD 65

• Pension x Revaluation x Discount Rate x Annuity Rate

Source: Royal London, Money Advice Service. Figures shown are for illustrative purposes only.

PENSIONS AND DIVORCE UNIFORMED SERVICES & PUBLIC SECTOR

Scheme CEV MCCV Difference

Police £624,000 £2,125,000 +240%

Armed Forces’ (75) £301,000 £587,000 +95%

Teachers’ (in payment)

£149,600 £244,000 +63%

NHS £273,300 £556,000 +103%

Firefighters’ (in payment)

£756,000 £1,240,000 +64%

Planning Point: Always consider independent

valuation for Armed Forces/Public Sector schemes

Source: Bradshaw Dixon & Moore Limited, Cash Equivalent Values versus Market Consistent Capital Values. Used with permission.

PENSIONS & DIVORCE

3 options

3. DECIDE IF/HOW TO “SHARE” IT

• Offsetting: the only option pre-1995

• Attachment: under the Pensions Act 1995*

• Sharing: under the WRPA 1999

3

*Can’t be used for pension payments in Scotland

Source: Money Advice Service, Dividing pensions on divorce or dissolution .

PENSIONS & DIVORCE

• The matrimonial assets are listed and valued

• One party retains/receives the (full) pension asset

• The other party retains/ receives financial assets of equivalent value

OFFSETTING

Source: Money Advice Service, Dividing pensions on divorce or dissolution .

PENSIONS & DIVORCE

• The order can be made on one or more of:

• Lump sum death benefit

• Lump sum when benefits taken (PCLS)

• Pension payments

ATTACHMENT

• COBS 19.2.4 ‘A firm should take into account the existence of any attachment (or earmarking) orders in respect of a client’s personal pension scheme or stakeholder pension scheme’

Source: FCA handbook , COBS 19.2.4 - Attachment (or earmarking) orders

PENSIONS & DIVORCE

From 6/4/15 scheme members >55 can take their pension as a cash lump sum

• Offsetting

Provide ready cash

Pressure from spouses?

Hiding of assets?

• Attachment

Member could cash out

Need to revisit order?

THE EFFECT OF PENSION FREEDOM

Planning Point: Review any pension attachment orders:

Pension Freedoms

PART 3 PENSION SHARING

PENSIONS & DIVORCE

PENSIONS & DIVORCE

• Allows the physical split of pensions benefits

• Public sector schemes invariably offer scheme membership

PENSION SHARING

• Order will specify % of value:

• Pension credit is now owned by the ex-spouse

• Member gets a corresponding pension debit

PENSIONS & DIVORCE TAXATION – PENSION CREDITS

Tax Aspect Effect of pension credit

LTA Can be enhanced if credit is from pension in payment

LTA IP2014/16 Credit added on for LTA purposes

LTA enhanced/FP12/14/16 Protection lost if new money purchase scheme

Annual Allowance None

Lump sum protection Only 25% available

Pension in payment – disqualifying pension credit

No PCLS available: • No UFPLS • Does not trigger MPAA

Planning Point: Where LTA protection applies, make sure the pension credit goes

to an existing scheme

Tax Aspect Effect of pension debit

LTA primary Primary protection factor reduced

LTA IP2014/16 Personalised LTA reduced

LTA enhanced FP12/14/16 None*

Annual Allowance None but watch MPAA

Lump sum protection Not reduced

Pension in payment Might pay less tax

* Protection will be lost where the member makes contributions or where benefit accrual in DB/cash balance schemes exceeds the

‘relevant percentage’

Planning Point: What’s the most tax-efficient

way of rebuilding assets?

PENSION DEBIT: TAXATION

PENSIONS & DIVORCE

PART 4 EXAMPLE CASE STUDIES

PENSIONS & DIVORCE

PENSIONS & DIVORCE EXAMPLE CASE STUDY 1

• Final Salary scheme, NRA 60

• CEV = £250,000

• Minimal pension

• Angelina’s solicitor wonders if this should affect the share out

• CEV recalculated at age 50= £450,000

• Angelina’s share was increased by £12,800 (from 40% to 45% of the original CEV)

• He is intending to retire at age 55

Brad Angelina

PENSIONS & DIVORCE CASE STUDY 2

• Several pensions from different careers:

• No pension at all.

Pension Value

RAC £20k

PP1 £30k

PP2 £45k

EPP £100k

• Adviser analysed the separate pension plans

• Chris gets 100% share on PP1, 66% share on PP2 and 0% on RAC and EPP

• The couple have agreed on a sharing order

• Chris’ solicitor is not sure which pension(s) should be shared

Gwyneth Chris

PENSIONS & DIVORCE PLANNING POINTS SUMMARY

Always consider independent valuation for

Armed Forces/Public Sector schemes

Review any pension attachment orders

What’s the most tax-efficient way of

rebuilding assets?

Where LTA protection applies, make sure the pension credit goes to

existing scheme

Make sure any divorcees have

reviewed/changed any nomination

PENSIONS & DIVORCE OUTCOMES

By the end of this session, attendees will be able to:

• Understand the divorce process and the options available for pensions in a divorce settlement

• Explain the relative advantages and disadvantages of the divorce settlement options to clients

• Understand the impact of pension freedoms on divorce settlements and describe the practical issues in relation to a pension sharing order

PENSIONS & DIVORCE THE ALTERNATIVE…

Source: news.bbc.co.uk/1/hi/world/asia-pacific/7661786.stmhttp://news.bbc.co.uk/1/hi/world/americas/7818751.stm

THANK YOU

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales,

company number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Marketing Limited is authorised and regulated by the Financial Conduct Authority and introduces Royal London’s customers to other insurance companies. The firm is on the Financial Services Register, registration number 302391.

Registered in England and Wales company number 4414137. Registered office: 55 Gracechurch Street, London, EC3V 0RL. RL Corporate Pension Services Limited, registered in England and Wales, Company number 05817049. Registered office is at 55 Gracechurch Street, London EC3V 0RL

March 2019 PR P PN 0080