I am often asked which pensions are potentially the most risky when it comes to pensions on divorce and particularly, pension sharing. Another common question is at what value can all pensions be ignored?
I always think this is a very subjective thing and very difficult to give a standard answer. Instead I prefer to work on the basis of high risk and lower risk. If we are always considering whether a pension is high risk or not then I believe you are giving yourself the best chance of not ending up with an unfair outcome. So in this context high risk might mean in relation to how the pension is invested but equally it can refer to the issue of valuation and whether the way the scheme approaches this is likely to be fair and whether an assessment of this needs to be undertaken to avoid a skewed outcome.
In my opinion I would categorise these pensions as high risk and I would have my radar on high alert:
- Final Salary / Defined Benefit – likely to be undervalued.
- All Public Sector Schemes – especially now we have the Career Average variants.
- Foreign Pensions – how can it be shared?
- Small Self Administered Schemes (SSAS) – how liquid?
- Self Invested Personal Pensions (SIPP) – what is it invested in?
- High Cash Equivalent Transfer Values – Lifetime Allowance impacts?
- State Pensions – particularly in the run up to the 2016 changes.
And these would be considered lower risk and I would have my radar on but at a lower level:
- Stakeholder pensions
- Personal pensions.
However, like everything it seems with pensions it is not always as simple as that. With these types of lower risk pensions there are areas which can catch you out. In particular, it is important to check policy terms to see if there are any guaranteed annuity rates or whether the current value and the transfer value are different (as can occur in with profits pensions).
Of course, where you have a mixture of these pensions in the settlement it is vital to ensure a like for like assessment is undertaken and not an apples and pears one!
So before you finalise the pension settlement pay heed to the cash equivalent transfer values, the type of pensions involved and what risks might be lurking underneath!
