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 October 4th, 2010
Whilst the NHS call centre and website are saying it could be up to next April before the new cash equivalent transfer values (CETVs) / Cash Equivalent Of Benefit calculations (CTVs) commence again, I understand that the new CPI factors are now starting to become available for the Public Sector Schemes.
The Fire Service and NHS pension scheme have confirmed receipt and they will be testing their systems over the next two weeks. The other schemes – Local Government Pension Scheme, Police Pension Scheme, Armed Forces- are expected over the coming weeks.
It is hoped that the end of this embargo (see here) will be soon and we can return to normal with requesting public sector pension transfer values.
If this is something that is currently affecting you, please feel free to contact us.
Tags: Armed Forces, Cash Equivalent of Benefit, Cash Equivalent Transfer Value, CETV, CETVs, CPI, CPI Factors, CTV, CTVs, Embargo, Fire Service, Local Government, Local Government Pension Scheme, NHS Pension, NHS Pension Scheme, Pension Transfer Values, Police Pension Scheme, Public Sector, Public Sector Pension Schemes | Posted in Cash Equivalent Transfer Values |
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Posted September 24th, 2010
The site has just had a makeover and we would welcome your comments. Let us know what you think and whether there are any areas you feel can be improved. Comments to advice@thedivorceifa.co.uk
We are seeing an increase of instructions month on month as issues such as the CETV embargo in the Public Sector take hold (see our previous blog on this).
We offer a free initial consultation and are happy to provide you with initial comment on a free, no obligation basis. So why not try us out. You can contact us for free on 0800 092 1229 or by email on advice@thedivorceifa.co.uk
Recent examples of our work include:
The quadrupling of the amount of state pension being paid to my client.
- Successfully arguing that a cash equivalent transfer value should be £140,000 and not the stated £90,000.
- Advising on 10 pension schemes within a divorce and reducing the costs of the actuary by £500 and implementation of the pension sharing orders by over £4,000.
So why settle for less?
0800 092 1229 or advice@thedivorceifa.co.uk
Tags: Cash Equivalent Transfer Value, CETV, CETV embargo, Divorce, Free, Free Initial Consultation, Initial Consultation, No obligation, Pension, Pension Sharing, pension sharing order, Pension Sharing Orders, Pensions, Pensions and Divorce, Public Sector, State Pension | Posted in Pensions & divorce |
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Posted November 23rd, 2009
It is often stated that Cash Equivalent Transfer Values (CETVS) are not an ideal method of calculating the true value of a defined benefit pension scheme on divorce. This is because they merely provide a snapshot of the value of a member’s pension benefit at a particular point in time.
What is most surprising is by how much these valuations can undervalue these benefits and therefore, how the unwary could find that they are losing out on potentially thousands of pounds.
I have highlighted below some examples taken from a survey done by the actuaries, Bradshaw Dixon Moore based on a sample of their own reports. The findings are startling and what is most surprising is the variations between the same schemes, particularly the Public Sector and Uniformed Services schemes.
|
Scheme
|
CETV
|
Actuarial
|
Difference
|
|
|
|
|
|
|
NHS
|
£120,000
|
£164,000
|
+28%
|
|
Local Government
|
£84,000
|
£138,000
|
+64%
|
|
Police
|
£283,000
|
£520,000
|
+84%
|
|
Army
|
£105,000
|
£394,000
|
+275%
|
|
Private Company
|
£380,000
|
£608,000
|
+60%
|
You can get the full details of their findings here. Pension-CETV-value-comparisons
I have been asked to comment recently on whether actuarial valuation reports are worthwhile and what value they add to financial negotiations. Many clients are naturally trying to reduce costs during divorce and see this as a potential cost saving.
My advice is that where defined benefits are involved, regardless of the scheme, an actuarial valuation is a necessity. By finding out the true value of the pension assets you will be in a much better position to negotiate a fairer settlement.
For information on any of the information provided here, please contact me at advice@thedivorceifa.co.uk
Tags: Actuarial Valuation Report, Army, Bradshaw Dixon Moore, Cash Equivalent Transfer Value, CETV, Defined Benefit, Divorce, Local Government, NHS, Pension, Pension on Divorce, Pension Scheme, Police, Public Sector, Settlement, Uniformed Services | Posted in Transfer values |
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Posted July 9th, 2009
I have attached below a very useful checklist for lawyers to use when working with clients with Public Sector pensions.
Public Sector Scheme Checklist
This checklist has been produced by Bradshaw Dixon Moore Limited and they have kindly given me permission to post it here. You can access further information on their actuarial services below:
www.bradshawdixonmoore.com
In addition, they also provide useful information and comment on divorce matters at:
www.ancillaryactuary.co.uk
If you require further information on The Divorce IFA, please call us on 01204 663904 or by email advice@thedivorceifa.co.uk
Tags: Actuary, Bradshaw Dixon Moore, Final Salary, Pension, Public Sector | Posted in Actuary |
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