My latest Financial Planning Case Study has been published in The Technical Area of Money Marketing magazine this week.
This is the section of the magazine where leading financial planners and paraplanners are asked to describe recent complex cases, sharing knowledge and experience with their peers to help raise collective standards in the profession.
Here is my latest case study, this time on the subject making assumptions when creating independent expert witness reports for pensions and divorce cases.
I have been asked to provide an Independent Expert Witness report for my clients who are in the process of divorcing. The husband has significant pension benefits, including final salary schemes, and an appropriate share needs to be calculated. What information do I need and what assumptions should I use?
If both are entitled to a full basic state pension this could be ignored for the purposes of the report, however, any SERPS/S2P should be taken into account and therefore a State Pension forecast for each party would be preferable. My understanding is that the DWP tends to expect any sharing of additional State pension to be dealt with by adjustment of the sharing order for occupational or private pensions.
For each final salary pension scheme the Cash Equivalent Transfer Value is required, whilst a valuation of any money purchase arrangements is also required. You would need to assume that the CETVs and policy values will remain the same at the point of implementation. In practice, the CETVs and policy values will be recalculated at the point of implementation and as such any figures would be subject to change.
In respect of any money purchase plans it would also be prudent to confirm whether there are guaranteed annuity rates, guaranteed growth rates or transfer penalties applicable. Again this could impact on the decision about which pension plans are shared with the spouse.
You would need to know the target retirement age for each individual and confirmation of health and smoker status as this could impact on annuity rates. You need to know whether you are targeting equalisation of income in retirement or an alternative split. The annuity rates used will be current rates and it will be assumed that annuity rates remain constant through to the date of annuity purchases. It is of course unlikely annuity rates will remain static in practice. I would point out that annuity rates are due to be equalised for men and women from 21st December 2012 following the European Court of Justice ruling.
You will need to decide on an annuity basis and I tend to favour a single life annuity, increasing by RPI and with a five year guarantee and this reflects the benefit typically available from a final salary scheme, but without provision for a surviving spouse’s pension. These can be sourced from the Financial Services Authority market comparison annuity tables. We will outline in the report an overview of the options available for taking an income at retirement and that annuity purchase is not the only option.
For each scheme the options available on divorce will need to be clarified. For example whether the final salary scheme offers shadow membership (internal share) or whether the only option is to transfer away to a private pension (external share). Some overseas schemes may not allow pension sharing at all and this would need to be taken into consideration.
We will point out that there are other ways of funding retirement income as well as pensions such as investments, the home, an inheritance or taking part time work.
Once all of this information has been obtained we can calculate the split of the CETV to provide the required split of income based on the respective standard, current annuity rates. We will assume that both parties will be subject to the same rate of tax in retirement.
After the required split has been calculated we will then need to consider how this can be implemented. It may be preferable for the spouse to become a shadow member of a final salary scheme as this would entail less risk for them, both investment and annuity rate risk, and is likely to give a guaranteed, inflation linked income in retirement. This may not be appropriate if the spouse has to wait until the member takes benefits before they too can take benefits.
This article was first published by Money Marketing on 21st June 2012
