By David Downie, Chief Actuary at WBR Group
The changes meant there is no need to apportion blame or fault to one spouse as to the reason why the marriage or civil partnership has broken down. No longer is it required that one spouse must effectively accuse the other of being responsible for the ‘irretrievable breakdown’ of the marriage, perhaps due to adultery or desertion. Under the Act which came into force in April 2022, dubbed the ‘no-fault divorce’ Act, a married person can wake one morning, ask their spouse for a divorce, and proceedings can begin.
Divorces will be going through the courts faster, and therefore the fair distribution of pension benefits on divorce takes on new significance.
The ‘grey’ divorce
You probably remember the news from over a year ago: after almost three decades of marriage, Bill and Melinda Gates had their divorce approved.
On the one hand, because of the money involved, their story was unusual, but on the other it wasn’t, the demographic trend for older couples to file for divorce has been seen for a while.
A study by US ‘fact tank’ Pew Research Centre found that, between 1990 and 2015, the over-50 age bracket had seen a doubling of divorce rates, while the over-55s had seen a tripling.
When older couples divorce, the family home is typically thought of as the main asset, but often the couple’s pension assets trump it as a value. In my experience, it isn’t uncommon for many clients, taking the example of an average bank branch manager with 25 years’ service, to rack up a final salary pension with a transfer value of £800,000.
As divorce rates continue to climb, particularly among older couples, there are going to be many cases where significant pension assets will need to be independently assessed.
Reaching a fair split
At this stage, actuarial support is crucial.
An actuary will assist the couple, and the courts, by outlining options on how pension assets can be split fairly. They will not pick sides but suggest how to achieve a fair outcome.
Firstly, they will allow for any age difference between spouses, which often means the fair distribution of benefits is rarely 50:50. This is not straightforward even for simpler schemes like money purchase or defined contribution. An age gap as narrow as three years can distort a 50:50 calculation, so an actuary will outline the options that provide an equal income.
Secondly, they provide clarity where a government sponsored final salary scheme, such as the Teachers’ Pension Scheme, is involved. Typically, the transfer values of these schemes are poor and insufficient for replicating the benefit for a spouse. Therefore, an actuary will assess the benefit on offer and seek to remove any distortion between transfer values, considering any other schemes the couple are in.
For example, both parties could have the same annual pension offer on the table, say £5,000, but the schemes’ values could be quite different. This is because transfer values are dictated by assumptions agreed by a scheme’s trustees. An actuary will strip everything back and value both elements using the same assumptions. Apples with apples.
The crucial role of financial advisers
A financial adviser may be the second person (perhaps the first) to hear about divorce proceedings. Should they come across any sort of complexity in the pension assets, they should seek independent actuarial advice.
Once the actuary’s report is ready, an adviser is best placed to walk their clients through the options. A report may include two or three possibilities, and an adviser can run through each scenario using simple cashflow modelling.
There’s limited benefit in telling the clients they will receive £500,000 because they may not be the same age, and they may have different income needs. They will not know if £500,000 is enough to meet their income requirements, but may well know, via cashflow modelling, if £3,000 a month for life will. That will mean something to them.
Sometimes one option for clients is to become a member of an ex-spouse’s scheme. This will give the new member a pension entitlement from the day they join. While it isn’t difficult to calculate the cashflow impact in this scenario, it’s still important that a professional explains it.
Once pension complexity has been identified, and an actuarial report completed, advisers can help their clients understand the financial implications of their options.
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