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 – firstname.lastname@example.org
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 February 8th, 2010
In many occupational schemes (especially the statutory ones – e.g. Police, Armed Forces) there has been a disparity between the normal retirement age of the member and that given to a pension credit member (the ex spouse). For example, the member can retire from the pension scheme at age 52 but the ex spouse cannot retire until age 60.
In addition, where the pension is in payment, there will be an immediate reduction of benefit for the member but the ex spouse’s pension will not kick in until age 60 (which could be many years away).
This issue has been neatly termed as “income gap syndrome” and it has been found not to go against the anti discrimination provisions of European Law.
Of course, this assumes that the ex spouse decides upon an internal transfer as the means to facilitate the pension share. There may be many reasons why the other option (an external transfer) is appropriate, but there will many situations where the only choice available is an internal transfer.
Regulations which came into force in April 2009 made provision for a partial solution to this issue which some of the statutory schemes are now starting to implement. The NHS scheme will now permit pension credit members to draw benefits after age 50 (or 55 from 6 April 2010) whilst an Armed Forces (2005) pension credit member can draw benefits at age 55. It should be noted that actuarial reductions will apply for early payment.
From a financial planning point of view it is wise to review the drawing of a pension credit benefit in line with your overall goals and objectives to ensure that any reduction is understood and budgeted for.
For more information on this please contact me on 0800 092 1229 or contact me by email, email@example.com