It’s February, the month when love is in the air and couples celebrate Valentine’s Day. So I thought I would talk about Financial Advice and Divorce.
People getting divorced will often engage with a Lawyer to assist with sharing assets and agreeing custody of their children. They don’t always think about engaging a Financial Adviser. But do you need a Financial Adviser when getting divorced?
According to New Model Adviser (Jan, 2018) “Statistically, January is the most popular month to commence divorce proceedings”. Maybe because everyone has been cooped up for Christmas or they cannot go on another year. Whatever the reason, it is important that on divorce, a holistic view of assets is taken.
Why are pensions important?
According to the Office of National Statistics, 42% of marriages in England and Wales end in divorce. The fastest growing age bracket for divorce is the over 60s. Again according to the ONS, in 2017 and 9% (over 9,000) of divorces involved couples who were over 60.
As my previous blogs highlighted, there is £11.1trillion amount of wealth in the UK. £4.5 trillion (40.54%) is in private pensions (excluding defined benefit pensions) and £3.9trillion is in property (35.14%). People often get fixated on assets when they divorce. It is however vital for separating couples and their professional advisers to consider not just how they will fund their lifestyle now but also how they will fund their retirement.
The fact that the vast majority of the UKs wealth is in pensions and with the increase in divorce in over 60’s, shows that pensions shouldn’t be ignored. They are an increasingly relevant consideration. However, research shows that pensions are still being overlooked (research by Scottish Widows showed they were only discussed in 30% of divorce cases).
Important considerations when splitting pensions
An important consideration as a lawyer is whether you have the knowledge, experience and authorisation to advise on pensions. I will cover off the things you may want to think about.
How would you analyse whether the transfer value offered by a scheme is good value and whether your client is getting their fair share?
In defined contribution pensions, this might be easy, the plan will have a value. The value will be based on where the money is invested, the number of units held and the unit price. There are other factors that may need to be considered. Such as whether the plan has guaranteed annuity rates, guaranteed growth rates, greater than 25% tax free cash and so on. These should be considered in how the assets are split.
Defined benefit pensions are more complex. The Cash Equivalent Transfer Value provided will be resultant from a complex actuarial calculation. This is based upon the promised pension built up, revalued to retirement age and scaled back based upon expected investment returns.
In the calculations, actuaries use certain assumptions, these may or may not lead to a generous transfer value. Small changes to the assumptions can vary the transfer value hugely. It is therefore important to engage specialists as early as possible to see if the value is generous or not. Certain types of defined benefit schemes do not offer transfer values that are aligned to the market. In such cases, an independent transfer value would be essential. For these reasons, it is important to engage a Financial Adviser in the process as early as possible.
It is difficult to establish whether the transfer value provided is generous and a complex analysis is required. Transfers where the CETV is greater than £30,000 cannot go ahead without financial advice from a pension specialist.
Where would you start analysing your client’s risk profile and how would you recommend where a pension share should be invested?
On splitting pensions, the result is often that the money needs to be housed in a separate pension for the receiving spouse. There are countless pension providers and products available. How would you go about carrying out the due diligence on the providers and be able to assist in ensuring the money is moved to a suitable arrangement?
Would you or your client know how to establish where their money should be invested? How will you measure their attitude to investment risk and select investments appropriate to this? Financial Advisers do this all the time and are well versed in discussing these issues with their clients and ensuring that they are invested appropriately.
How would you look at multiple asset and income streams to establish if your client will have sufficient income now and in the future?
By utilising cash flow modelling, Financial Advisers are able to demonstrate how capital and income could be utilised. Based on tax, performance (investment returns) Cash Flow can illustrate how long capital will last based upon how much income is drawn. This enables clients to visualise how their assets can generate an income and for how long it may last. It can also help them to look comparatively not only at a figure now but also its potential value well into the future.
What if the client is close to or had pension assets over their lifetime allowance?
The order in which benefits should be taken is an important consideration. Especially where the pension in in excess of the Lifetime allowance (currently £1,030,000). Should pension benefits be taken before sharing, this could potentially lead to a 55% tax charge. However, where LTA protection is involved, it may be better for the individual with protection to utilise this before sharing their pension.
If the pension being shared is in payment – the donor partner can reclaim their LTA used. The recipient will have their split tested against their LTA. Not the annual allowance.
When splitting pension taking the LTA into account, the way in which they are split and the impact on the lifetime allowance can be very complex.
It is vital that lawyers understand the importance of the way in which this is ordered and how to minimise potential tax charges. Or they could collaborate with a Financial Adviser to assist them in doing so.
Advice should be sought as early as possible so that analysis can be carried out as thoroughly as possible. Pensions are really complex and it is important that a professional is involved especially if there are multiple schemes or large values. For defined benefit schemes with a value of over £30,000 a financial adviser will have to provide any advice.
Do you need a Financial Adviser when getting divorced?
Should Financial Advice and Divorce go hand in hand? For me in a lots of cases, the answer to this question would be yes. Financial Advice and Divorce is especially required if there are pensions involved or you want to understand how assets can generate income post-divorce.
Or if you are a Lawyer, contact me, I would love to meet. If you are an individual going through a divorce, contact me for a no obligation complimentary initial meeting.