PENSIONS & DIVORCE A PRACTICAL GUIDE This is for financial - - PowerPoint PPT Presentation

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PENSIONS & DIVORCE A PRACTICAL GUIDE This is for financial - - PowerPoint PPT Presentation

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PENSIONS & DIVORCE A PRACTICAL GUIDE This is for financial adviser use only and shouldnt be relied upon by any other person. PENSIONS & DIVORCE OBJECTIVES By the end of this session, attendees will be able to: Understand the

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This is for financial adviser use only and shouldn’t be relied upon by any other person.

PENSIONS & DIVORCE

A PRACTICAL GUIDE

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PENSIONS & DIVORCE OBJECTIVES

2

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 impact of pension freedoms on pensions and

divorce

  • Consider the issues facing clients and solicitor connections in

relation to pensions and divorce.

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PENSIONS & DIVORCE DISCLAIMERS

We will assume:

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

  • pposite sex marriage…
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PART 1

BACKGROUND

PENSIONS & DIVORCE

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PENSIONS AND DIVORCE BACKGROUND

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

Source: ONS, 26 September 2018

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 Wife Husband

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PENSIONS AND DIVORCE BACKGROUND

Source: ONS, 26 September 2018

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

2000 4000 6000 8000 10000 12000 14000 16000 18000 1992 1997 2002 2007 2012 2017

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PENSIONS AND DIVORCE BACKGROUND

Source: ONS, 26 September 2018

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

200000 400000 600000 800000 1000000 1200000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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PENSIONS AND DIVORCE BACKGROUND

Almost all (92%) of the brides and grooms aged 65 and over in 2014 were divorcees, widows or widowers, with

  • nly 8% getting married

for the first time.

Source: ONS

Planning Point: Make sure any divorcees have reviewed/changed any nomination

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SLIDE 9

PENSIONS AND DIVORCE THE MARKET

“Nearly one quarter of a million people face divorce in the UK each year, with the majority needing financial assistance. Yet there are just 42 accredited financial adviser specialists in family law – that’s one adviser for every 5,000 people.”

Source: Resolution with the Personal Finance Society “Unlock the divorce and separation market”

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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

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PART 2

THE LEGAL PROCESS

PENSIONS & DIVORCE

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PENSIONS & DIVORCE Irretrievable breakdown:

  • 5 criteria:

THE LEGAL PROCESS

adultery unreasonable behaviour desertion two years separation + consent 5 years separation without consent

  • The reason for the divorce does not affect

the financial settlement

  • 2 separate legal processes…dissolution

and financial remedy

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PENSIONS & DIVORCE THE LEGAL PROCESS

Dissolution

  • Court order
  • Collaborative Law
  • Mediation
  • Online – does NOT include financial remedy!

Financial remedy

  • Kids’ needs first
  • Clean break, 50/50 split preferred
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PART 3

PENSION OPTIONS

PENSIONS & DIVORCE

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PENSIONS & DIVORCE 3 stages: ACTION POINTS

Find the pensions

1 2 3

Value the pensions Decide how to split the pensions

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PENSIONS & DIVORCE Factfind

  • Assets, liabilities and income for both parties
  • Can use Form E for voluntary disclosure
  • Required if full disclosure ordered by the Court
  • 1. FIND THE PENSIONS

1

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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

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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

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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.

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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.

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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

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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

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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

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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

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PART 4

PENSION SHARING

PENSIONS & DIVORCE

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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

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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

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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

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PART 5

EXAMPLE CASE STUDIES

PENSIONS & DIVORCE

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PENSIONS & DIVORCE EXAMPLE CASE STUDY 1

Paul Heather

  • Pension in payment

£200,000 p.a.

  • Capital value of Paul’s

pension = £3,350,000

  • Much younger, minimal

pension

  • Heather’s solicitor argues

this is unfair

  • Paul is not prepared to offer

a share :

  • 1. They weren’t married very

long

  • 2. She’s young enough to

fund her own pension!

  • Widow’s pension valued

at £1m in her hands

  • Heather received an

extra cash settlement

  • f £500k
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PENSIONS & DIVORCE EXAMPLE CASE STUDY 2

  • 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

  • riginal CEV)
  • He is intending to retire at

age 50

Brad Angelina

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PENSIONS & DIVORCE CASE STUDY 3

  • 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

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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

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PENSIONS AND DIVORCE

  • www.bdm-web.com

Independent actuarial valuations

  • https://www.wikivorce.com/divorce

Divorce wiki

  • http://www.resolution.org.uk

Organisation of 6,500 family lawyers and other professionals FURTHER READING

“Financial Adviser Specialist Accreditation is open to associate members of Resolution who hold a QCF Level 4 plus AF3/G60 and a valid Statement of Professional Standing (SPS).”

Source: Resolution with the Personal Finance Society “Unlock the divorce and separation market” http://www.resolution.org.uk/editorial.asp?page_id=1013

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PENSIONS & DIVORCE OBJECTIVES

35

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 impact of pension freedoms on pensions and

divorce

  • Consider the issues facing clients and solicitor connections in

relation to pensions and divorce.

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PENSIONS & DIVORCE THE ALTERNATIVE…

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

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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 and is a member of the Association of British Insurers. Registered in England and Wales 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 number 4414137. Registered office: 55 Gracechurch Street, London EC3V 0RL.Royal London Corporate Pension Services Limited is authorised and regulated by the Financial Conduct Authority and provides pension services. The firm is on the Financial Services Register, registration number 460304. Registered in England and Wales number 5817049. Registered office: 55 Gracechurch Street, London EC3V 0RL. November 2018 PR 6 PN 0086