Posted March 4th, 2011
“I am about to receive a pension sharing order and need advice about investment”
This is a very popular question and the first thing I always do is to double check the information provided on the pension sharing options with the existing pension scheme. The reason I double check is often the information provided to the spouse is appalling and it is often incorrect. I see misinformation provided on a daily basis!
Internal transfer or external transfer?
Sometimes the pension scheme will offer an internal transfer of benefits and you can remain in the scheme. Often the benefits on offer to you are good and worth staying in the scheme for. You should be looking for true shadow membership.
But if you have to exit the scheme (and this is very common) it is necessary to check what schemes are available for the pension credit to go into. Questions to consider are:
• Do you have any personal pensions already?
• Do you have a works scheme? And can this take the transfer?
• If not, what is on offer from the market.
Advice on the most suitable pension to transfer your pension credit should be taken. Ensure your adviser is suitably qualified. The Financial Services Authority insists on a certain level of qualification to undertake this work.
Investment
On an external transfer the investment of the pension will be important because you will be taking on two new risks – how it performs between now and your retirement and how much income you will eventually draw out at retirement.
If you are a long time from retirement you could consider investing in growth assets (equities/property) which tend to be more risky or if it is a short time to retirement more defensive assets (cash / gilts) to protect your capital value. Setting a goal in terms of retirement income is also advisable.
When working with my clients I undertake a thorough review of their attitude to risk and tolerance to risk, their options in terms of pension sharing and from this provide advice on the most suitable pension arrangement and investment strategy to meet their goals.
If you would welcome some assistance on your pension sharing order, your options and how to get it implemented, please feel free to contact me on 0800 092 1229 or email me phil@thedivorceifa.co.uk
Tags: external transfer, internal transfer, Investment, Pension, Pension Credit, Pension Scheme, Pension Sharing, Pension Sharing on Divorce, Pension Sharing Options, pension sharing order, Personal Pension, Retirement, Shadow Membership, Transfer | 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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