New report sheds light on important area of pensions on divorce
13 November 2019
Pensions are a complex but very important feature on divorce. A group of pension experts and legal professionals have recently joined forces to provide guidance to help improve understanding in this area with the aim of producing fairer and more consistent outcomes for divorcing parties.
The report was published in the summer of 2019 and has become known as The PAG Report (Pension Advisory Group Report).
The report covers explanations of the different types of pensions and certain ‘traps’ to look out for when considering the value of pension assets in a case. In particular caution must be exercised when looking at the Cash Equivalent (CE) of pensions. This is the figure that is commonly produced by the pension schemes (based on government guidelines for calculation of pension values for divorce purposes) but this which do not always reflect a fair and realistic value of the pension.
For example, in defined benefit schemes – often called final salary scheme – (such as the police, army, fire service etc) the CE’s can be much lower than the actual cost of replacing the benefits on the open market, meaning that the pension may be much more valuable than first appears. The same can apply to some defined contribution schemes (also known as money purchase, or private pensions) that have guarantees embedded in them, such as guaranteed annuity rates, making the benefits much more valuable than the CE suggests.
It is recommended that in almost all cases where there are pension assets a pensions expert should be involved to establish the fair and realistic value of a pension and advise as to the best approach to sharing the pensions fairly and to the best economic advantage of both parties taking into account relevant issues such as taxation – a real issue for members of the NHS scheme at the moment – and the lifetime allowance which currently stands at just over £1m.
What about retaining the home or other assets instead of pension – offsetting?
The PAG Report also provides guidance on pension offsetting – where one party seeks to retain non-pension assets (such as the family home) as a trade-off against pension. It is important that anyone considering offsetting understands the value they might be losing, retaining or acquiring in order to ensure that the offset is fair. The difficulty is one of comparing two completely different types of assets (often referred to as ‘comparing apples with pears’) where you are trying to compare a whole of life income stream against current capital assets. There is guidance in the report as to how this difficult issue might best be approached in order to avoid unintended and unfair consequences.
It is hoped that the guide will lead to greater understanding amongst those advising their clients in relation to this issue and will lead to divorcing couples obtaining fairer outcomes on divorce.
At Birketts we can provide advice on dealing with all aspects of divorce and separation including pensions. If you have any queries please do not hesitate to contact Lisa Cornish or another one of our family law specialists. Law covered as at November 2019.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at November 2019.