Case Study 1
Jane is 56 years old and has been a member of the NHS Pension Scheme (1995 section) for 25 years. She has a current salary of £38,000 and an accrued pension of almost £12,000 per annum. The transfer value (CETV) provided by the scheme was £200,000.
The NHS Pension Scheme has two sections, the 1995 section and the 2008 section, which have different retirement ages and benefits. Since Jane belongs to the 1995 section she will be entitled to receive her pension benefits from age 60, but the Scheme incorrectly used the CETV basis for the 2008 section which assumed that she would not be entitled to her benefits until age 65.
This meant that Jane's CETV had been incorrectly quoted as it did not reflect that she was able to receive her pension benefits from age 60. When this was identified a correct CETV was issued which increased by £55,850 to £255,850.
close boxCase study 2
Graham is 50 years old and he has been member of a private sector final salary scheme. His deferred pension is £25,000 per annum and the CETV provided by the scheme was £280,000.
In this case the CETV has been calculated on a weak basis which results in the CETV significantly understating the value of the accrued benefits. If allowance is made for more up to date life expectancy assumptions and lower interest rates than those used for calculating the CETV then this results in an increase of £70,000 to £350,000 – an approximate increase of 25%.
close boxCase Study 3
Judith is 66 years old and was member of a private sector final salary scheme. She retired on a pension of £20,800 per annum. The Cash Equivalent Benefit (CEB) provided by the scheme was £340,400.
Historically the Scheme to which Judith belongs provided discretionary increases in line with price inflation. The basis on which Judith’s CEB had been calculated did not take account of these discretionary increases. Recalculating Judith’s CEB with allowance for these discretionary benefits results in a CEB of £420,000, approximately 24% higher than that originally quoted on the TV basis.
close boxCase Study 4 - example 1
Example 1 Gordon is 37 years old and has been a member of the Armed Forces Pension Scheme for the last 14 years. His salary is £36,000 and he has accrued a pension entitlement of £6,200 p.a. The CETV provided by the scheme was £62,800. The Armed Forces Pension Scheme allows members to retire upon completion of a certain number of years service dependent on their rank. A pension is paid immediately on leaving the Armed Forces after 16 years ‘reckonable’ service as an Officer or 22 years ‘reckonable’ service as another Rank. The CETV quoted by the Scheme was based on benefits being payable from age 60. If Gordon were to leave service now then this CETV would reflect the actual age at which pension would be drawn and would be appropriate for applying a Pension Sharing Order without adjustment. However if it is Gordon’s intention to continue in service, he would be able to retire from age 45 on completion of 22 years service. Taking this into consideration the adjusted CETV for Gordon would increase by over £67,000 to around £130,000.close boxCase study 4 - example 2
Example 2 Scott is 48 years old and he has been member of the Police Pension Scheme for 26 years. His salary is £36,000 per annum and he has built up a pension of £18,000 a year. The CETV provided by the scheme was £440,400. Members of the Police Pension Scheme are entitled to retire from age 50 if they have completed 25 years service and once the member has completed 25 years service the CETV is calculated on the assumption that benefits come into payment at 50 (or immediately if the member is over age 50). Scott is currently still in service and, though he is entitled to retire at age 50, is likely to continue to work for the foreseeable future due to his changed financial position following divorce. The Scheme provided a CETV which was calculated on the basis that Scott would draw benefits from age 50 but he has decided that it is highly likely that he will choose to stay in service until age 60. Taking this information into account, the CETV as quoted significantly overstates the value of the accrued pension benefits by around £180,000 as the CETV adjusted to allow for Scott’s intended retirement date would be of the order of £260,000.close boxDefined benefit
A defined benefit arrangement is a scheme which provides the member with a fixed entitlement at their retirement date. Examples of this type of arrangement in the public sector could be the Police Scheme, Civil Service Pension Scheme, Armed Forces Pension Scheme, Local Government Pension Scheme or in the private sector could be final salary schemes, career revalued earnings (CARE) schemes or cash balance schemes operated by many private sector employers. In most cases valuing these entitlements on divorce can be complex and we would recommend discussing your entitlement with one of our Pensions on Divorce experts to see how you might be affected and if a report would be of value.close boxDefined Contribution
A defined contribution pension arrangement could be a contract based arrangement such as a personal pension or stakeholder pension, or a trust based occupational pension scheme. The ultimate value of the benefits payable will be based upon the contributions paid, the investment growth achieved and the rate at which the fund value built up is converted in to a pension payment. This type of arrangement tends to have a clearly identifiable value which can be used for divorce purposes. Additional complexity would only arise where certain types of investment (e.g. with-profits funds or guaranteed return funds) or where guaranteed annuity rates exist which could call in to question the CETV value provided. Where this is the case we would recommend discussing this with one of our pensions on divorce experts to see how you might be affected and if a report would be of value.close boxGranting authority - member
Authority can be given to a third party to act on your behalf and an authority letter can be found in the support pack. Giving authority to Spence & Partners or your solicitor to receive information about your pension entitlement will incur a cost to you and therefore should be considered carefully.close boxGranting authority - solicitor
Authority can be granted to a solicitor to obtain information from the pension scheme administrator. Should the solicitor be granted this authority it is their responsibility to ensure the information is received from the administrator in a timely fashion.close boxGranting authority - spouse
If ancillary relief has been applied for by either party both parties must be provided with a copy of all necessary pension information along with the name and address of those responsible for the pension arrangement (usually the pension administrator). If ancillary relief has not been applied for by either party you must gain authority from the pension scheme member to collect the necessary information from the pension scheme directly. There are a number of ways you can do this including asking your spouse to contact the pension scheme directly and then pass the information to you, your solicitor or Spence & Partners, once received. Or Your spouse can grant permission for you or your representatives to obtain the necessary information from the pension scheme directly.close boxOffsetting
If one party has significantly more pension assets than the other party then the division of “non pension” assets can be adjusted (offset) to allow for this. In order to go down this route the first question has to be – What is the value of the pension assets?
close boxPension Attachment
This solution has been largely replaced by Pension Sharing but may be beneficial in some circumstances. It is much less commonly used than either sharing or offsetting.
The big drawback to this approach is that the pension assets are not transferred to the name of the spouse. The spouse must wait until the party owning the pension benefits chooses to draw those benefits and these benefits will cease on the pension scheme member’s death or on remarriage of the spouse.
close boxPension Sharing
Pension Sharing results in part of the pension assets held by one partner being transferred to their spouse. As the transferred pension assets are then held in the spouse’s own name this provides a “clean break” solution.
A pension share is normally expressed as a percentage of the CETV, the factors which should be taken into account in considering pension sharing are:
- Expected income to each party on applying a specified % pension share
- Expected cash lump sum which each party could expect on applying a % pension share
- Age at which benefits can be drawn by both parties
- The value of pension benefits to each party pre and post pension share
- Where more than one pension arrangement exists, which pension should be shared?
- Costs associated with pension sharing and who meets these costs
- Risks and uncertainties and how to manage these
In some cases (mainly public sector schemes), benefits for the spouse are set up within the scheme and must remain there. A significant proportion of private sector schemes insist that the spouse transfers the value of the benefits from a pension share to another arrangement whilst some schemes provide the spouse with both options. The amount of benefits, how certain it is that these benefits would be provided, and the level of flexibility will depend heavily on the approach adopted by the pension scheme.
close box
