We continue our series of hot topics in family law in a COVID-19 climate. Manders Law Managing Partner, Mary-Ann Wright, speaks to Keith Churchouse a Chartered Financial Planner and Chartered Wealth Manager on the treatment of pensions on divorce that family law clients are concerned about in the current crisis. If you are currently engaged in proceedings or are contemplating proceedings at this challenging time and pensions are involved, the information and practical guidance below will be of relevance to you.
About the Interviewee
Keith Churchouse is a Certified Financial Planner, Chartered Financial Planner and Chartered Wealth Manager. He is also a Fellow of the Personal Finance Society (FPFS) and will celebrate 35 years in UK retail financial services later this year. His qualifications also include a BA Honours degree in Financial Services from Napier University. Since October 2004 he has been the director and co-owner of Chapters Financial Limited, which is a Chartered Financial Planning company based in Guildford and authorised by the Financial Conduct Authority.
Keith penned the book, Sign Here, Here and Here! Journey of a Financial Adviser in 2010 and has followed this with additional texts, including The Recession is Over Time to Grow and Scared of Something Different: Journey of Business Disruption & Innovation. As he notes at the start of his popular book, Sign Here, Here and Here!, “Add to your world, it makes life a lot easier and any income created becomes a consequence rather than a target.”
Given that it’s never been simple for even the reasonably well-versed individual to understand the real benefit that a pension, deferred or current, may have, can you explain why pension values in divorce are so important, particularly at this time?
It is in fact quite simple. Pensions have real value. The problem with pensions has always been their relative intangibility. Property in the form of bricks and mortar can be seen, touched and valued by most people based on current economic market conditions and this can lead people to underestimate the importance of dealing appropriately with pensions on divorce. Some pensions just offer a market value. Some offer an individual a pension income based on their final salary and length of service, usually escalated with inflation if deferred from yesteryear. These types of pension can often be referred to as final salary, or defined benefit, type pensions, and can hold great value. Taking this further, and in our experience, we have seen situations where pension values are worth more than the marital home, which is likely to have a significant bearing on any financial negotiations in divorce.
In the COVID-19 climate how do you find out what the real value of a pension is?
Just as in a non-pandemic environment, each pension provider will be contacted to gain a value, or up to date transfer value, of the pension benefit accrued by the owner. We know that there is currently significant delay in some providers providing this information and time estimates given to the client or court should take account of this
It should be noted that in the last few years, from mid-2016, we have seen pension transfer values rise significantly for defined benefit / final salary type pension plans, and based on current economic factors, this upward pressure continues, although not guaranteed, into the future. We have detailed an example increase over the recent period below.
This has never been more important than it is now when values are changing quite dramatically as a result of the effect of the pandemic on markets. More on these volatile fund value changes in the questions below. Managing expectations is vital when looking at pension values and is likely to have a bearing on what assets you want allocated to you from the matrimonial division.
With a Decree Absolute and Financial Agreement received, how long does it take for any agreed pension changes to be completed in the current climate?
Once you and your solicitor receive a sealed Pension Sharing Order from the court and the provider is notified with a copy, you should bear in mind that even in normal circumstances the transferring scheme may take its time to transfer, although some used to be reasonably prompt (and by that, I mean a month as an example) the fact is that service times have significantly increased for many pension companies in recent times in a COVID 19 climate.
As one example, we made an application to a large pension administrator for a transfer value on a final salary scheme at the very end of January 2020, before the lockdown struck. At the time of writing, we hope to have the valuation at the end of May, the administrators citing the lockdown as the cause of the delay. What the time standard will be going forward may well be longer.
Other schemes know that they have up to four months from receipt of all the paperwork (and the application of their administration charges) and do take the full time to make the transfer. Will the courts allow longer periods to elapse for the administration of transfers? The current concern is that there may be no choice, with transfers being achieved when they can be, rather than time bound.
Remember that fund values can fall as well as rise during this time and you have little control over the final value you receive, other than to know that it will be the agreed percentage of the fund value on the date it is executed.
If you were to have a 100% Pension Share Order on a Personal Pension Plan, dated 01 February 2020 with a fund value at that time of approximately £800,000, and this fund was transferred on 01 April 2020, the 100% value received could have been approximately £655,000 (Balanced Portfolio/ Not guaranteed). That’s a fall in value of approximately 18% (Source: Chapters Financial).
Correspondingly, a typical defined benefit / final salary pension transfer value calculated on 01 February and 01 April may have remained broadly unchanged or even increased slightly due to falls in long term gilt yields and inflation expectations but such changes would very much depend on the nature of the scheme pension benefits and the transfer value basis. (Source: Cartwright Group Limited)
With significant swings in value, such as these examples, taking advice on the pension position within a divorce can be vital to understand the risks and implications of any negotiation and offsetting you would want to consider.
For an initial FREE consultation on any aspect of family law, call Manders Law on 01245 895 105 or email us here.
Note: this blog is intended to give an overview (rather than comprehensive guidance and advice) on your legal or financial position and is provided for information only. It is not an endorsement of any product or service provider.