My daughter is divorcing her husband. They have been married for 18 years and lived together before that for seven years.
She works part-time for her local council and has a final salary pension with a cash equivalent transfer value of £120,000. She is 45 years-old. Her ex has a private pension worth £280,000. He is 50 years-old.
He says his pension is of equal value to hers and they should keep their pensions out of the divorce split. Is it correct that a final salary pension is worth so much more?
Valuing retirement funds: Can a pension pot of £280k be equal to a £120k final salary pension?
Tanya Jefferies, of This is Money, replies: Pensions are typically a couple’s second most valuable asset, after the family home.
You are therefore right to be concerned that these are split fairly in your daughter’s divorce, as if this is done without assessing them properly, it could have a material impact on her retirement.
When you say her husband has a private pension, this suggests it is a modern ‘defined contribution’ scheme.
This is where people build up individual pots and bear all the investment risk themselves during working years, and after retirement as well unless they choose to buy an annuity providing a guaranteed income for life.
A final salary or ‘defined benefit’ pension like your daughter’s is generally more generous and safer because an employer shoulders all the responsibility.
After retirement, these pensions provide a guaranteed income until someone dies, and then a reduced income to any surviving spouse until they die too.
So, these two types of pensions are very different and hard to compare. Also, even two pensions of the same type might be different in some respects.
This is why divorcing couples often pay an expert to work out how to divide their pensions. Usually, your divorce lawyer will know a pension specialist and refer you to them.
We asked a lawyer with experience in this area to reply to you, and she stresses the importance of hiring an expert to value pensions in an accurate and fair way. It sounds well worth the cost.
Justine Flack, a partner at law firm Howes Percival, specialises in relationship breakdown with a particular focus on the financial aspects. She replies:
Justine Flack: What is often preferred is an outcome which tries to provide the parties with equality of income from all pension sources at the point of retirement
Pensions are unique assets to deal with. Unlike the balance of a bank account which tells you exactly what you have, the cash equivalent transfer value (CETV) of a pension doesn’t necessarily reveal its true value.
They are also different because unlike a bank account, they may not be accessible now. Both your daughter and her husband are below retirement age and so these are assets which will meet their needs in the future.
How do you value different types of pension?
In your daughter’s case we are dealing with different types of pension which makes comparing value based on CETV difficult because they are calculated in different ways. The CETV may not fully account for all benefits.
This is often the case with ‘defined benefit’ schemes, which is the technical term used to describe your daughter’s final salary pension.
This may be why her husband suggests that her fund, which has a lower CETV, is of similar value to his in real terms.
However, we don’t know that because we don’t know what each fund will generate for them at the point of retirement.
There are limitations to the use of the CETV so your son-in law’s approach should be regarded with caution.
To find out whether the funds are comparable in terms of actual pension, a report should be obtained from a specialist pensions expert.
What is a pension sharing order?
These are made to divide retirement savings as part of a financial settlement in a divorce, writes This is Money.
They are agreed on a ‘clean break’ basis, so that ex-spouses walk away with pensions that they control themselves from then onwards
Your daughter has hopefully already got a divorce lawyer – if not, I recommend that she instructs one to safeguard her interests.
They will be able to recommend a suitable pension expert.
They will properly review the value of the two pensions, comment on any inequality which will be generated and recommend the level of any pension sharing order which may be required to create fairness.
In addition to the pensions you have mentioned, account should also be taken of the state pension provision which your daughter and her husband have. It is important that all pension provision is accounted for.
How are pensions typically shared in a divorce?
The starting point with pensions is how to achieve equality for the parties.
Equality can be looked at in terms of fund value – the expert will firstly assess whether the CETV’s are accurate – and equality of income in retirement.
They will be able to assess the income which would be generated if the fund values are equalised. That can sometimes show real discrepancies, particularly where one party does not have a final salary pension scheme.
What is often preferred is that we achieve an outcome which tries to provide the parties with equality of income from all pension sources at the point of retirement.
If required that can be considered at different retirement ages. The expert will also take account of the impact of the age difference and the fact that your daughter’s husband will reach retirement before your daughter.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
This is a long marriage; the court would consider it as being 25 years as it will add the cohabitation period to the length of the marriage.
Most of the pension has been built up during the relationship and so any suggestion that only the pension which arose within the relationship should be taken account of should be resisted.
That is a discretionary approach for the court but is unlikely to be followed where fairness or the needs of the parties in a case mean that the entirety of the funds should be considered.
Sometimes people look to offset pension rights against other assets. I try and avoid that and treat pensions separately.
This is because, as I pointed out at the start, they are unique assets so working out the capital asset to take in the alternative is very difficult and can lead to inequalities.
What action should your daughter take now?
The combination of the different types of scheme in your daughter’s case and their values is such that I would recommend a getting an expert to draw up a pension sharing report.
The cost of this depends on how many pensions need to be valued, what type they are and how many questions are posed to the expert.
However, the price of this should be looked upon as an investment to ensure that fairness is achieved in how pensions are treated within the divorce.