Posted October 21st, 2010
I am often asked by clients what is the difference between equality of capital and equality of income calculations. And why is it important to ensure that before instructing an actuary each party understands what the calculations might mean for them.
To illustrate this issue I have provided explanations of each calculation below together with a worked example.
Equality of capital
This is the simplest approach to sharing pensions. It often mirrors what has happened elsewhere in deciding how to split the other marital assets. So, lets assume that a 50:50 division of capital is agreed.
Example 1 – Equality of Capital (50:50) Male aged 65 / Female age 60
Before
Male CETV – £200,000
Female CETV – £0
After
Male CETV – £100,000
Female CETV – £100,000
Male – annuity income – £6,535 per annum*
Female – annuity income – £5,687 per annum*
(Source: The Exchange – October 2010)
*Annuity purchased is on a single life basis, 5 year guarantee with no escalation.
Result
So we have equality of capital but not equality of outcome / income.
Equality of income – same clients
This calculation attempts to rectify the outcome detailed above. It takes into account the client’s ages, health (if relevant) but most importantly the difference in sex! The key point here is that it costs more pension cash equivalent transfer value (cetv) to provide a woman with the same amount of income than it does a man.
Example 2 – Equality of Income
Before
Male CETV – £200,000
Female CETV – £0
Share needed
Male CETV – £93,050
Female CETV – £106,950
Annuity income now
Male annuity income – £6,080 per annum*
Female annuity income – £6,082 per annum*
(Source: The Exchange – October 2010)
*Annuity purchased is on a single life basis, 5 year guarantee with no escalation.
Result
So by sharing pension 46.53%:53.48% the client’s have equality of income.
This is a very simplistic case but I think it illustrates the issue nicely. Where the pensions involved are final salary or defined benefit, the client is in ill health or there are major differences in their ages (i.e. 10 years plus) then these issues complicate the calculations and it is necessary to get professional actuarial advice.
Should you wish to discuss equality of capital versus equality of income, please contact us here.
Tags: 5 year guarantee, 50:50, Actuary, Annuity, Calculation, Cash Equivalent Transfer Value, CETV, Defined Benefit, Division of Capital, Equality of Capital, Equality of Income, Equality of Outcome, Final Salary, Ill Health, Marital Assets, no escalation, Pension, Pension Sharing, Sharing Pension, Sharing Pensions, Single Life Basis | Posted in Pension Sharing |
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Posted October 10th, 2010
I am often asked what the differences are between defined benefit (or final salary) schemes and defined contribution (or money purchase) schemes and why those differences are important in the context of pension sharing and divorce.
Defined benefit / Final salary
As the name suggests the final pension received in retirement is defined in advance, based on an accrual basis (for example, 1/60th or 1/80th), the length of pensionable service and the level of pensionable salary at retirement.
So for someone with 40 years service on a final pensionable salary of £40,000 in an 80ths scheme the pension payable in retirement will be £20,000 per annum.
This pension will increase each year in line with the escalation provided by the scheme (this can vary) and the employer / pension scheme carries the investment and inflation risks.
Pension Sharing
The benefits provided on pension sharing vary between schemes and these should be reviewed carefully before proceeding as often the risks of providing the benefits change hands!
On an internal pension transfer, sometimes the benefits available to the pension credit member are defined benefits, which is the case with the Public Sector Pension Schemes. These defined benefits are often very valuable to the pension credit member and it would be unusual not to advise that these should be taken.
Alternatively, the pension transfer may be placed in a money purchase arrangement often known as the default option. Here, the risks pass to the pension credit member (see below).
On an external transfer, there will be no defined benefits available (unless an annuity is being purchased) and the pension share will be placed in an individual pension arrangement. Again the risks are passed on.
Defined Contribution / Money purchase
In a defined contribution / money purchase arrangement the amount being paid into the pension scheme is defined at say 3% or 5% of salary but the final benefits are not fixed.
Instead, the final pension available is a function of the amount invested in, the investment return and prevailing annuity rates. Therefore, the pension scheme member carries all the risks.
Pension Sharing
When looking at pension sharing and money purchase schemes it is important to check what internal options are available and to check these against what is available in the pensions market.
There will be no guarantees on the income payable until an annuity is purchased and the associated risks need to be considered in the context of retirement planning goals.
If you require further information on defined benefit or defined contribution schemes, please contact us here. You can find further information on pension sharing here.
Tags: 1/60th, 1/80th, 40 years service, 80ths scheme, Accrual basis, Annuity, Default Option, Defined Benefit, Defined Contribution, Divorce, external transfer, Final Pension, final pensionable salary, Final Salary, individual pension, individual pension arrangement, inflation, internal options, internal pension, internal pension transfer, Investment, Money Purchase, Pension Credit, Pension Credit Member, Pension Scheme, Pension Sharing, pension sharing and divorce, Pension Transfer, pensionable salary, pensionable service, Public Sector, Public Sector Pension Schemes, Retirement, Risks | Posted in Pension Sharing |
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Posted August 13th, 2010
Impaired life annuities provide a greater pension income to those with shorter life expectancies than would be available from standard annuities. Impaired annuities are intended for serious conditions such as:
• Chronic heart disease
• Cancer (secondary and some primary)
• Chronic Lung Disease
• Parkinson’s Disease
• Alzheimer’s Disease
Please note this list is not exhaustive.
Enhanced annuities also provide an increase over the standard rate available and are given for lifestyle conditions such as
• Diabetes
• Heart attack
• Chronic asthma
• High blood pressure
• High Cholesterol
Again, this is not an exhaustive list.
The market is maturing and there are providers who specialise now in areas such as smoker annuities and more recently, postcode annuities. These work on the basis that statistically, people in different parts of the UK have different life expectancies.
Many people when taking their pension share on divorce decide to purchase an annuity. If you are considering purchasing an annuity as part of your pension share, please stop and consider whether you might benefit from one of these annuities.
If you require any further assistance, please contact us on 0800 092 1229 or email advice@thedivorceifa.co.uk
Tags: Alzheimer's disease, Annuities, Annuity, Cancer, Chronic asthma, Chronic heart disease, Chronic lung disease, Diabetes, Divorce, Enhanced annuities, Greater pension income, Heart attack, High blood pressure, High Cholesterol, Impaired life annuities, Lifestyle, Parkinson's Disease, Pension, Pension and divorce, pension share, Postcode annuities, Shorter life expectancies, Smoker annuities, Standard annuities, Standard rate | Posted in Annuity, Ill Health |
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Posted July 30th, 2010
From 2011/2012 the Government announced in its budget their intention to remove the compulsory need to purchase an annuity from age 75.
As an interim measure, legislation will be written into the Finance Bill 2010 to increase the purchase age to 77. This increase in the age to 77 by which time the member must secure an income has effect on or after 22 June 2010. The change applies equally for Inheritance Tax purposes to members who die on or after that date.
Since April 2006, it has not been compulsory to purchase an annuity at age 75 (although some individual schemes insist on it) when an alternatively secured pension (asp) became an option. ASP has not been universally popular due to the poor income rates and punitive tax charges (up to 82% on death!).
The Government intends to consult shortly on the finer detail of what is planned. Watch this space on developments which in my opinion, will have far reaching implications for divorce, annuities, annuity rates and retirement planning.
If you require any further assistance, please contact us on 0800 092 1229 or email advice@thedivorceifa.co.uk
Tags: 82%, Age 75, Age 77, Alternatively Secured Pension, Annuities, Annuity, Annuity rates, April 2006, ASP, Compulsory annuitisation, Divorce, Pensions & divorce, Retirement Planning, Tax | Posted in Annuity |
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