Pensions and Financial Planning on Divorce

It is well known that pension entitlements may be the second biggest asset in a marriage after the house – in many cases it is the biggest.

Legislation requires the “Cash Equivalent Transfer Value” (CETV) to be obtained for use in divorce proceedings. However there are frequent occasions when the CETV is not a fair reflection of the pension value, and that the divorce petitioner may suffer an unfair settlement if it is used. Here are a couple of examples.

• An army sergeant aged 39 had 19 years service with an accrued pension to date of £8,000 per annum. His CETV, calculated, as is required, on a normal retirement age of 60, was £86,000. However, taking account of his ability to retire at age 42 after 22 years of service, a “proper” value of his pension is £214,000, a difference of £128,000, more than twice the equity value in their house.
  
• A businessman aged 58 has a pension of £18,000 per annum payable from his normal retirement age of 65. The CETV was quoted at £28,000. On enquiry, it transpired that the TV had been reduced (as is allowed under Regulations) because of the extremely poor funding position in the scheme and that the unreduced value was £262,000. There is believed to be little chance of the company becoming insolvent over the next 7 years while the deficit is being run off so the proper value of the pension could be taken as the full amount, an increase of £234,000, again much bigger than the house value.

We have many years of experience advising parties to a divorce, and their legal and professional advisers. Our approach is based on a one-on-one meeting covering the whole financial context, to give a (usually much-needed) picture of the main issues which need to be addressed. This is summarised in a short report letter.

There are sometimes technical pensions and investment issues, where one of the parties has a complex pension benefit, insurance policy of investment asset. We can provide expert reports, either for one party or as a single joint expert where the parties have agreed that they, and the court, will commission just one report on a specific issue. Typically, this might cover the actuarial assessment of the value of a final-salary pension scheme benefit, where the standard CETV (cash equivalent transfer value) may not value aspects like future early retirement benefits and future salary increases which may be significant in the total family assets. The report will explain the issues for non-specialists, explain the calculations and the uncertainties (there are always uncertainties in assessing the value of payments long into the future), and give our professional opinion on the issues put to us. Other issues might include the merits of different options of “pension sharing” if (typically) a divorcing wife is to receive part of her husband’s accrued pension in a final-salary company pension scheme – is it better to have this within the company pension scheme, or taken out into a personal fund?

Actuarial assessments will often help where there are future income and payment flows needing to be taken into account in the financial settlement – for example interests in trust funds, the calculation of future maintenance payments needed to produce an eventual retirement income, or the value of lifetime (or limited period) occupation of the family home.

As authorised independent financial advisers, Excalibur Actuaries are able to arrange transactions in pensions and investments, working on a non-commission basis which can substantially enhance the value of an investment. We are able to provide a continuing financial advisory service where needed, for example to help a client manage a portfolio of investment and pension funds, and to secure income through annuities and other means at retirement.

Excalibur Actuaries work entirely on a partner time-fee basis, with a firm money fee quotation provided wherever practicable in advance of work being undertaken. All work is done by an actuary with over 30 years consulting experience, and a benefit to clients is that they get an overall financial “health-check” and access to an independent second opinion on financial transactions, where many individuals at the time of a divorce have to become involved in, but have little understanding of, complex and large transaction.