Tuesday, 12 December 2017

    Rough guide to pensions and divorce

    Laura MacPhee looks at what trustees need to be aware of when divorce settlements loom

    Divorce is a complicated business, and it will normally be a fraught and emotional time for all parties involved. They should spare a moment to consider the pensions implications of their decision, though, otherwise they could suffer serious financial consequences. Trustees are in a position to point them in the right direction and help avoid worsening their situations.

    WHAT DO TRUSTEES NEED TO DO?

    The parties will normally ask the trustees to produce the cash equivalent transfer value, which is the monetary value of the member’s pension. Members have the right to ask for one of these calculations each year. How they do this will depend on the type of scheme:

    • Money purchase arrangements: this is relatively straightforward and the member may be able to work it out as they will have access to the figures about their pot size
    • Defined benefit: requires actuarial calculations. Ordinarily the parties will then ask for a pension sharing order, which crystallises this amount. The spouse can then receive it in two ways:
    • As a member of the scheme, with a separate member record – if the scheme is underfunded the trustees must offer this to the divorced spouse
    • If the scheme is not underfunded the trustees can say the spouse cannot be a member, and must accept a transfer into another scheme

    JARGON BUSTER

    Consent order: The legal document that confirms how a divorcing couple have agreed to divide their financial assets

    WHAT CAN TRUSTEES CHARGE FOR?

    • The original legislation states that trustees can charge for the actuarial calculations to fi gure out the cash equivalent transfer value where the member makes more than one request in a year
    • Implementing the consent order, which costs the member around £250

    KEY PROBLEMS TRUSTEES MAY FACE

    • Making sure consent and pension sharing orders are drafted in a way that aligns with the scheme rules
    • Making sure they familiarise themselves with the consent orders so they can check what they need to do and ensure they are not going outside their fiduciary dutie
    • The cost of setting up separate member records for the spouse, administering them, and keeping them up to date
    • Recovering costs, for example where the former spouse has received no benefits (usually because of the way the scheme rules are drafted)
    • Family solicitors, and even courts, may not understand the pensions issues – sometimes the orders presented are “ineffective because of procedure hasn’t been properly followed”, says Stephenson Harwood partner Graham Wrightson – for example, where there is more than one scheme, the wrong one has been written on the order.

    CASE STUDY

    Trustees should not underestimate the importance of consent orders. One woman was almost left empty handed after her ex-husband died before his normal retirement age.

    They had reached a financial settlement on the premise that she would receive half the cash lump sum he would have been entitled to when he reached his normal retirement date.

    “She was effectively left with nothing because the consent order hadn’t even thought that there might be another lump sum which might be available if he were to die before that event,” says DLA Piper partner Kate Payne.

    In this case, there was. The scheme rules had been very unusually drafted as the definition of a person eligible to receive a lump sum should a member die was wide enough to include a former spouse.

    The trustees felt the default position where she received nothing did not reflect the agreement she had reached with her former husband.

    “They made a decision in her favour because they felt it was not right that she got absolutely nothing, but had that definition not been as widely drafted in terms of the death in service lump sum, she would not have been eligible to receive anything, and they wouldn’t have been able to do anything about it,” says Payne.  

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