Division of pension assets in divorce

15 Jul

Division of pension assets in divorce

Introduction

You clearly need a solicitor to represent you in divorce proceedings, but why would you involve a financial adviser? 

First, a little background

Section 25 of the Matrimonial Causes Act of 1973, stated that a ‘clean break’ was the aim of any divorce settlement.  Pension offsetting was the preferred method of achieving a ‘clean break’, with regard to pension assets. This method assigns a value to the pension, which is then offset against other assets and income.

The Pension Act 1995 made it mandatory to include pension rights in a negotiated divorce settlement.  The act also introduced ‘pension earmarking‘, which was an attempt to allocate, to each divorcee, a proportion of the pension. This was a messy solution that gave little control of the pension assets to the former spouse and consequently did not result in a ‘clean break’.

The Pension Reform Act 1996 introduced pension sharing which, like pension offsetting,  involves assigning a value to the pension.  In this method, the court allocates a proportion of the stated value to the former spouse. After which, the former spouse can transfer the benefits to an existing, or new, pension plan achieving the desired ‘clean break’.

Valuing a pension

You might be wondering how the pension, to be offset or shared, is valued.  Well, it’s the pension provider that attempts to calculate the capital sum required to purchase equivalent pension benefits.  Unfortunately, the providers do not use standardised values for factors such as inflation, investment return etc.  Due to the length of time involved with pension investments, small changes in these parameters can significantly alter the calculated value.

The role of the financial adviser

The financial adviser can work for either party, to ensure the use of fair assumptions in the pension valuation.  Before undertaking the work, an advisor should give consideration to ‘Proportionality of Cost’. This means the potential benefits of reviewing the assumptions and calculation should outweigh the fee for the associated work.

Additionally, the adviser can ensure that the receiving pension plan and investments are appropriate for the client’s circumstances and financial objectives.

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