Covid-19 blog series:
How will my pension be affected on divorce?
The current pandemic has thrown us all into a difficult period of uncertainty which has had a profound effect on every aspect of our lives. The economic effects in particular are sure to be a worry as we simply do not know what the long-term consequences are going to be. This presents particular challenges for separating couples who wish to resolve the finances associated with their marriage especially where there are pensions to be considered within their settlement.
When considering pensions upon divorce, it is of utmost importance to have a clear understanding of the nature and value of the pension pot. There are two types of pension schemes: –
- Defined Contribution Schemes – These types of schemes are dependent on the funds that an individual places in them and their investments in the stock market. They are also known as money purchase schemes and most people working in the private sector are likely to have such a scheme.
- Defined Benefit Schemes – These types of schemes provide an individual with specific funds upon retirement on a final salary or career average basis. They are more likely to be found in the public sector, for example, the NHS and or the Armed Forces.
The value of an individual’s pension scheme is usually provided by way of a Cash Equivalent Transfer Value (CETV). However, the value of an individual’s pension in the current financial climate could be impacted by several factors which need to be taken into consideration when approaching the division of pensions at this time: –
Has there been a fall in asset values?
A drop in the stock market is likely to have a direct effect on the value of Defined Contribution Schemes given that, as detailed above, their nature is dependent on the performance of the market.
Could there be property valuation issues?
Small Self-Administered Schemes (SSAS’s) or a Self-Invested Personal Pensions (SIPP’s), which are types of Defined Contribution Schemes, can allow for investments in assets such as property. It is unclear how the pandemic has impacted the property market and as such it has been reported that some Chartered Surveyors are currently placing caveats on their property valuations.
Has there been a reduction in gilt yields?
A reduction in gilt yields is likely to impact private Defined Benefit Schemes. Where there is a rise in the value of the gilt, its yield falls. Although an increased value of the gilt is likely to result in a higher pension CETV, this may present a problem in the future and result in circumstances where there is a shortfall and the pension scheme simply can’t honour the CETV when it comes to implementing a pension sharing order. This may in turn result in individual’s being faced with the possibility of having to accept a reduction in funds to those which they were expecting.
Are the standard mortality assumptions going to apply?
The long-lasting physical effects of Covid-19 are unknown. As such it is difficult to predict how an individual’s life expectancy may be impacted and in turn whether the standard mortality assumptions which are made when considering pension valuations will still stand.
Is it possible to rely on a pension valuation which was obtained prior to the pandemic?
Unfortunately there is no simple answer to this. Every pension scheme is different and every separating couple’s circumstances are different including what type of pension each party has and what risks they are willing to take given the current uncertainty. However, for many Defined Contribution Schemes it is highly likely that any valuation calculate pre Covid-19 will be out of date and a new valuation will be required.
When dealing with pensions on divorce, in many cases it is necessary to appoint an expert known as a Pension on Divorce Expert (PODE) to assess how pensions should be shared between the parties depending on the circumstances of the case and the types of pensions in question. Given the current economic climate, it is even more imperative that specialist legal and financial advice is sought before reaching a financial settlement on divorce in order to ensure that any order relating to pensions is fair with full appreciation of the value of the assets involved.
If you would like any further advice or assistance in respect of the treatment of pensions on divorce and the likely effect of Covid 19, contact our expert family law team on 0113 322 9222 or email@example.com