Accurate valuations
Accurate valuations of all pensions are important in divorce settlements to ensure a fair division of assets. Pension sharing orders can be used to split pensions, or alternatively you can “offset” the value against capital.
The “CETV”
The Cash Equivalent Transfer Value (CETV) is a representation of the monetary value of your pension benefits – whether defined benefit or defined contribution pensions. However, it is essential to understand that CETVs might not reflect the true value, especially for defined benefit schemes.
Defined Benefit Pensions (aka Final Salary)
The value of these pensions is determined by the benefits received in retirement, but the valuation can be complex due to guaranteed benefits and inflation protection.
When dividing these pensions, it’s important to consider not just the CETV but also the income they will provide in retirement, as well as any other benefits under the scheme (e.g. inflationary increases in retirement income).
Defined Contribution Pensions
These pensions are essentially an accumulated pot of money (which will be invested), and the value will vary depending on contributions and investment performance.
The CETV is typically an accurate valuation, as it reflects the current market value of the invested funds.
Summary
Self-Invested Personal Pensions (SIPPs)
These are DIY pensions, where you decide how to invest your pensions (e.g. in shares or funds). Valuing SIPPs involves assessing the value of the underlying investments, which can fluctuate based on market conditions, day to day.
SIPPs offer greater control over investment choices compared to traditional pensions. Given the variability in value, it is important to have accurate, up-to-date valuations.
State Pensions
State pensions in the UK (the basic and new) are not directly divisible in divorce settlements.
Adjustments can be made through the redistribution of other assets to compensate for the value of any large state pension entitlements in the overall settlement.
A spouse with a lower National Insurance contribution record can potentially increase their entitlement through the ex-spouse’s contributions, known as a “State Pension substitution.”
At a Glance
Challenges:
- Difficulty in accurately valuing defined benefit pensions
- Volatile values of Self-Invested Personal Pensions (SIPPs)
Benefits:
- Flexible options for pension division
- Possible increase in State Pension entitlement for lower-earning spouse
Defined Benefit
These promise a specific retirement income based on salary and years of service. The CETV may be misleading, and it is particularly important to instruct a Pensions on Divorce Expert to identify the true value.
Defined Contribution
Your contributions will be invested on your behalf, with the aim of growing over the years until your retirement. The pension pot can be split, creating two separate pots.
SIPPs
You will decide what to invest your pension pot in. Like other defined contribution pensions, SIPPs can be divided using a pension sharing order. Seek advice from a financial expert who specialises in SIPPs to ensure both parties receive a fair share.
State Pension
Understanding how state pensions can affect the overall settlement can be important, particularly for individuals close to retirement age.
Pension sharing
During a divorce, pensions can be split between the parties so that both have their own pension pots. It is important to review the investment performance and potential growth of these pensions, together with any management fees, and to understand what pension income in retirement the pension sharing may achieve.
We can assist you with accessing specialist advice to ensure that pension sharing is fair.
Getting started
At Starke Family Law, we use a sophisticated online platform to streamline the process and gather essential information efficiently, you can get started online now.
This article does not constitute legal advice.