Posted December 10th, 2010
Do you know what the default option is when considering pension sharing?
In my previous blog I detailed the difference between an internal transfer and an external transfer. The default option is the underlying option that the pension scheme will implement should the pension credit member not decide how to implement the pension sharing order.
Sometimes, this can be an internal transfer or more often, it is an external transfer to a pension arrangement of the pension scheme / trustees choosing.
So, to avoid having your pension sharing order implemented by someone else or receiving a poor pension by default it is important to check your options first and let the trustees/pension scheme know what you want. It really is a case of taking the bull by the horns!
I keep a check on which pension scheme offers what. If you would like to know more about default options and pension sharing, please contact me on 0800 092 1220 or send me an email – email@example.com
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.
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.
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.
Posted September 6th, 2010
Pension sharing is a confusing and complicated part of any divorce settlement and there are many issues to be aware of before proceeding. Some examples include:
- The fairness of a cash equivalent transfer values (CETV).
- Internal transfer or external transfer?
- Moving target syndrome?
- Default options.
Therefore, it was a refreshing change to be contacted by a client this week who had received notification from her pension provider (Prudential) that she HAD to take financial advice before they would agree to accept the pension sharing order.
To avoid the pitfalls above it is important to take financial advice from a competent adviser, preferably one who is a Resolution Accredited Independent Financial Adviser (See link here). You may also wish to employ the services of an actuary that advises on pension and divorce cases.
If this is you and you are looking for financial advice on a pension sharing matter or if you require further information, please contact me on 0800 092 1229 or email firstname.lastname@example.org
Posted August 31st, 2010
In my previous blog, I set out a summary of some of the common issues I am asked to help with in relation to the implementing of pension sharing orders. Here I will add some further information on issues surrounding the whereabouts of such orders.
Under the regulations, the court should send the pension sharing annex (form P1) within 7 days of the making of the pension sharing order or of decree absolute (whichever is the later) to the pension scheme involved.
This is immediately where a breakdown in communication can occur because the implementation period will not start until the pension scheme has all of the documentation necessary and received payment of its implementation fee. This documentation will not only include the decree absolute and the pension sharing annex but also birth certificates, and often, where the share is being dealt with by way of an external transfer, details of the new pension arrangement and a trustees indemnity. There can be other requirements.
I am often approached by clients who were not aware that they even had to make a decision on a new pension arrangement. This can hold up the process or even result in the existing scheme deciding upon a default option, which may not be appropriate.
I have even had on one occasion a client pass me a court stamped pension sharing order which had been kept safe in her drawer. It was 4 years old!
So it is important to keep tabs on where your pension sharing order is and who is responsible for making sure the order is implemented in a timely manner.
If this affects you and your pension sharing order has disappeared or you are unsure of what to do next, please contact me on 0800 092 1229 or email email@example.com