PowerPoint template by xiangpeng

VIEWS: 6 PAGES: 35

									           Pensions & Divorce
     Dissolution of Civil Partnership
                         Keith Bell, 13/03/08

This presentation is directed at professional financial advisers. It should not be
             distributed to, or relied upon by, private customers
Agenda

1.   Summary of options

2. Valuation

3. Implementation and consequences




2
The background – bad news/ good news
Number of divorces
    2004                   167,000
    2005                   155,000
    2006                   148,000


Average age at divorce (E&W)
    Men                    43yrs
    Women                  40yrs


2/3rds involve one party with private pension provision


    source: national statistics office




3
Part I – The options
Summary of Options

•Offsetting

•Attachment / Earmarking

•Sharing (nee splitting)




5
Offsetting
Long-standing method

Trade pension benefits against other matrimonial assets



+                                _
                                 Difficult if pension value high
Clean break
                                 Tangible v’s intangible
Easy to understand
                                 Emotional attachments
Cheap to implement ?
                                 Current needs v’s tomorrows needs
Simple




6
Attachment (earmarking)

Court makes order on scheme

To pay benefits to ex-spouse or ex-civil partner

% of TFC, pension and/or lump sum death benefit



+                                     _
                                      Control
If nearing retirement?
                                      No clean break
On lump sum death benefit?
                                      No change of ownership
Illiquid assets?
                                      Order may cease on death




7
Sharing

Physical split of benefits

Order specifies % to be deducted across benefit tranches

Private sector schemes must offer transfer out

    - may offer shadow membership

Public sector normally only offer shadow membership

                                    _
+                                   Different priorities?
Clean break
Control / independence              Loss of ancillary benefits
Member can rebuild                  Tomorrow vs today


8
Low take up of pension sharing

Why?
    Too expensive?
    Too complex?
    Only useful for those near pension age?
    Only useful if large pension?
    Family lawyers & judiciary still not sure about the rules?




9
Part II Valuations
Valuation – CETV

•CETV - Cash Equivalent Transfer Values
        for all pre vested or USP funds

•Annuities and Scheme Pensions in payment
      valued by provider, trustees or actuary in line
      with CETV’s

•State Second Pension Scheme
       DWP calculates




11
Valuations

Scotland – pension assets accrued during marriage

England & Wales – all the assets




12
CETV - DB issues


Value - could you replicate the   Objective - equal pension income
benefits
                                  Past service reserve
Death Benefits
                                  Future salary increases
Discretionary Increases
                                  Mortality assumptions
Solvency
                                  Clients ages
Shadow membership
                                  Funding
Service related enhancements




13
CETV – MP

Equal income or equal share of fund

Transfer penalties

Death benefits

Guaranteed Annuity Options

Retirement ages




14
Don’t forget

Ill health

State Pensions




15
Summary

     Identify all pension arrangements

     Obtain transfer values & other ‘basic info’

     Is the valuation recent?

     What type of scheme – DB, DC, SIPP, etc?

     Don’t accept information at face value

     Make it clear its for divorce or dissolution purposes




16
Reach a decision

     Decision on individual circumstances

     Decide end result & work backwards – ie net income

     Minimise risk of unintended consequences




17
Part III Implementation &
Consequences
•The member
•The ex partner
Arrange the order

                    Form P1 is there to help

                    Available from
                    http://www.hmcourts-service.gov.uk

                    Make sure its complete




19
Implementation - timing

Court order & Scheme Administrator

4 months to value and discharge

-21 days to provide information

- 21 days from receipt of all data to inform member /
spouse when the order will be discharged

-21 days from discharge to notify member / spouse




20
Implementation

Make sure scheme gets all docs, info & charges

Destination for pension credit chosen?

Other advice to ex-spouse or ex-civil partner

Advice to member




21
Old pensions regime

<6/4/2006

8 regimes

Contribution limits

Benefit limits

Investment restrictions

Restricted benefit options

Limits on death benefits




22
New pensions regime

<6/4/2006                    >5/4/2006

8 regimes                    1 regime

Contribution limits          No contribution limits

Benefit limits               No benefit limits

Investment restrictions      Wider investment choice

Restricted benefit options   Greater benefit choice

Limits on death benefits     Higher death benefits




23
So what changed?

No change to legal process

Must still obtain court order & appropriate annex

Same time limits apply

Impact depends on type of order




24
Impact on pension attachment

Benefits still owned by member

All tested against one lifetime allowance

Old drawbacks remain

Existing court order may be affected - higher benefits?




25
Example

Earmarking order made in 2000 on personal pension

100% tax-free cash to be paid to ex-spouse

Funds c.£500k (100k protected rights)

<6/4/06 payment £100k

>5/4/06 payment is £125k

Impact on member?




26
Impact on pension sharing

Both parties test against own lifetime allowance

Special provisions for fund protected

Enhanced lifetime allowance in certain cases

Safeguarded rights problem

Easier choice of receiving scheme – but not all provide same benefit
flexibility, investment choice, etc




27
Protection & pension sharing

Primary (or backup)

     must notify Revenue & get revised certificate

     protection lost if reduced <£1.5m

Enhanced

     no need to revise certificate (unless primary backup)

     will just keep benefits remaining



NO PROTECTION GIVEN TO PENSION CREDIT




28
Protections available for ex-spouse

Enhanced lifetime allowance for pension
shares

     Effected before 6/4/06
     Or made on benefits in payment on or after
     6/4/06

Revenue forms available to register

Time limits




29
Safeguarded rights

Pension credit from contracting-out benefits

Cannot be taken before age 60

Cannot be commuted

Communication problems

Solution in Pensions Bill?




30
Rebuilding after pension share

Numerous opportunities to recover
o    Personal contributions to 100% earnings
o    Employer contributions ‘unlimited’
o    Final year flexibility
o    Use of pension input periods
o    Salary and bonus sacrifice




31
The need for financial advice

Getting it wrong
     earmarking order on % of TFC – but didn’t oblige member to commute

     earmarking order on % of lump sum on death – but rebate-only PP

     sharing order on DB scheme – but all post-97 so all safeguarded rights

     sharing order made but no receiving scheme chosen

     attempts to replace earmarking order with sharing

  sharing order made on contracts with special features – guaranteed annuity
rates, high transfer penalties, high tax free cash, SIPP




32
Summary

Complex area

Impact varies from client to client

Many pitfalls for the unwary

Specialist pensions advice a necessity




33
Thank you



Keith Bell
Head of Technical Services
AEGON Scottish Equitable
Lochside Crescent
Edinburgh EH12 9SE

www.aegon.co.uk




34
     Important information


     This information is based on AEGON Scottish Equitable’s understanding of
      current legislation, taxation law and HM Revenue and Customs practice
                           which may be subject to change.



           AEGON Scottish Equitable is a member of the AEGON Group.
             Scottish Equitable plc is authorised and regulated by the
                           Financial Services Authority.




35

								
To top