PENSIONS & DIVORCE · Divorces of opposite sex couples: Men and Women age 60 and over 0 2000 4000...
Transcript of PENSIONS & DIVORCE · Divorces of opposite sex couples: Men and Women age 60 and over 0 2000 4000...
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
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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