Pension Sharing – Equality of capital versus Equality of Income
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.
