Calculating a pension share on divorce
When a couple get divorced the subject of “pensions splitting” often arises.
In the somewhat “sexist” world in which we live it often involves a share of the ex-husband’s pension fund being credited to the ex-wife.
Sometimes, in occupational pension schemes, this can be done by “shadow membership” where the ex-wife effectively becomes a member of the scheme and a proportion of her ex-husband’s pension becomes payable to her.
However, more often the share is carried out by a capital sum being transferred to a pension plan of the ex-wife’s choice (a share of the cash equivalent transfer value or the cash equivalent benefit value where the pension is already in course of payment, of the ex-husband’s pension benefit).
The calculation of the split is often carried out to provide equivalent income for the two parties.
The usual method of calculating what it costs for the ex-wife to have the same income as the ex-husband is to use a suitable annuity rate to work out what share of the pension fund she should have.
Where the ex-wife is younger than the ex-husband it will come as little surprise that she often has to have a higher share of the capital value to ensure she gets the same amount of income. On the surface this may seem unfair but actually it is perfectly fair.
Annuity rates however are at pretty much an all time low and therefore sometimes the parties to the divorce will look to an alternative way of creating the income from the pension split.
Unsecured pension routes offer the alternative of a pension fund that remains invested whilst “income” is drawn from it.
As you can imagine this is not without risk because if high levels of income are withdrawn and investment returns are lower than expected capital erosion of the fund can occur and ultimately this can lead to lower future income.
So as unpalatable as it can seem for some (usually the ex-husband) the annuity route is the one most favoured in the calculation and probably the fairest way to carry out the calculation.