Welcome to the second article in our series focusing on pension sharing implementation.
The first article touched on considerations that needed to be made prior to the pension sharing annex being completed and the decree absolute being applied for.
In this second article, read about some of the aspects your client needs to think about now that the decree absolute has been granted and the divorce has been finalised.
This is an ideal time for your client to engage with a financial planning firm to map out what needs to happen next and to seek assistance with implementing the award.
Internal pension sharing
In the case of public sector pension schemes (NHS, uniformed services, TPS etc.), the recipient of a pension sharing award will become an internal member of their ex-spouse’s pension scheme – there is no alternative.
In instances such as this, a financial planner will not necessarily be required to assist with the implementation of a pension sharing award. That’s because the process is purely administrative and there are no real choices to be made.
However, engaging with a financial planner could still add some value here. For example, a client may require help with the paperwork, or perhaps some broader financial planning work is required to outline how the pension sharing award has impacted on the individual’s financial future?
Some cashflow modelling work could be beneficial here. Maybe the pension share will enable an individual to retire early or work part-time hours?
Internal or external pension sharing
There are still some defined benefit schemes (notably the Universities Superannuation Scheme) where there will be an option to take:
- An internal share (so that benefits mirror the ex-spouse’s in style)
- An external share where a lump sum will be transferred out to a defined contribution style arrangement.
In cases such as these, a solicitor should take care not to influence the client’s choice, such as ticking the relevant box when completing the pension sharing annex. This can be construed as providing financial advice which is beyond the authorisation of most family lawyers.
Instead, it is a good idea for the recipient of the award to seek assistance from a financial planner as there could be many factors involved which will determine what the right course of action will be.
For example, the recipient of the award may already have significant defined benefit pension entitlements elsewhere and may require (or desire) the flexibility afforded by defined contribution benefits.
Examples here could be to assist them with early retirement or in “phasing” their retirement whilst reducing hours at work. Of course, the increased flexibility would need to be weighed against the benefits that the recipient might ultimately have received by having additional guaranteed benefits in the ex-spouse’s scheme.
Broader financial planning is imperative in these cases to identify the correct route for the client.
External pension sharing
In most non-public sector cases the only option will be to transfer the pension share out of the ex-spouse’s scheme and into a defined contribution style personal pension or occupational pension scheme.
In circumstances like these, the advice will focus on whether the client already has a suitable contract that could accept the credit or whether they need to establish a new contract.
There are many issues involved here – too many to cover in a single article! The headline is that strategic financial planning will help to determine what sort of scheme a client requires to accept the pension sharing award.
For example, will a client need to draw immediate benefits once they receive the pension share? A common scenario here is that the recipient of the pension share is relying on the pension fund to pay a tax-free cash lump sum which could assist with rehoming.
Another example could be that the recipient wants to draw immediate benefits from the pension share. Consideration needs to be given here as to whether drawdown or an annuity is the most appropriate approach.
Of particular note is where cases have Lifetime Allowance issues to consider. Due to the recent freezing of the Lifetime Allowance, we are likely to see an increasing number of cases where clients will require additional advice to address the implications of the resulting tax liability and, where possible, the avoidance of the tax in full or part.
The process could take up to nine months or more
It is important to stress here that the time between the decree absolute being finalised and the recipient having the pension funds transferred into their own name can be considerable.
We will cover off some of the pitfalls of pension sharing implementation in the next article, but it is not uncommon for the whole process to take up to nine months from the date of divorce to the point where funds have been transferred from the ex-spouse’s scheme. We have been involved in examples where it took much longer than this.
Identifying a client’s needs and objectives
Of course, the steps the client needs to take will be driven by what the client needs or wants the pension share to do for them.
Naturally, the pension sharing award will interact with their other resources, and capacity to borrow in the case of rehoming issues. A much more broad-based financial planning piece of work needs to be undertaken, rather than just concentrating solely on the implementation of the pension sharing award.
Financial planning is the process by which we discover and explore a client’s needs and objectives. A process of deep questioning determines an individual’s desired lifestyle and how this can be best delivered by utilising all the financial resources at hand.
Once the client has received the decree absolute (and preferably before) the next point of call should be to speak with a financial planner to identify how they can move things forward to achieve these objectives.
At BlueSKY this means using some very sophisticated financial planning cashflow modelling software which enables us to show the client in a rich and easy-to-understand visual form how their future might play out based on a variety of scenarios.
This cashflow modelling helps clients to make logical decisions and to understand the impact of the different choices that they could make. It is extremely useful for those individuals who are looking to draw immediate benefits from their pension award and will help to uncover how best they can do this and the advantages and disadvantages of taking different approaches.
Getting the paperwork right
A key aspect of the work we do for divorcing clients when implementing a pension share is looking after the administrative aspects of setting up a new pension. We also make sure that all the paperwork has been filed to enable the transferring scheme to execute the pension sharing award in a timely and efficient manner.
We have had many instances over the years where clients have tried to implement a pension share themselves but, for various reasons, got stuck.
This is usually due to incomplete documentation. This meant that the process dragged on for an unnecessarily long time. Interacting with a financial planner would have greatly sped up the process and allowed the client to move forward with their life.
Naturally, most of the implementation work that we deal with involves defined contribution style arrangements.
Not only does a pension plan need to be selected which is appropriate for the client but also the underlying investments need to be chosen. These will be determined by several factors, not least the client’s attitude to risk, the size of the award, and when they need to access the benefits.
Advice on how to rebuild lost pension benefits
While this article has concentrated on some of the issues that a recipient of a pension sharing award needs to consider, we also regularly help those that have given away a pension share.
We give advice on rebuilding pension funds and to help clients visualise what the loss of benefits mean for them. With a reduced Annual Allowances for high earners and Lifetime Allowance problems, this can be quite a tricky maze to negotiate.
However, in many instances, seeking financial planning advice and assistance will help clients to rebuild their resources to limit the effect of giving away a portion of their pension.
6 key points from this article
The key takeaway from this article is that working with a financial planner can help your clients understand the process, complete the share in a timely manner, and determine the best way to deal with the pension share.
- If the pension sharing is in relation to a public sector pension scheme, the need to seek financial planning advice may not be as vital (although could still be useful).
- If the transferring pension scheme offers external or internal membership, then clients should consider taking financial advice so that they can choose the right option to meet their longer-term objectives.
- If the pension credit is of significant value (£100,000 or more) and needs to be transferred to an external pension scheme then, again, taking financial planning advice is likely to be advantageous.
- Working with a financial planner can help to reduce the time taken to implement the pension share. Offloading the administration to somebody that is used to dealing with such matters can ensure that the pension sharing award is implemented with a pension provider that can do what needs to be done. This ultimately ensures that a client’s longer-term objectives are met.
- Liaising with a financial planner can help a client to visualise what impact the pension sharing award will have on their long-term lifestyle and what this means for them.
- If giving away a pension share, liaising with a financial planner can help an individual to rebuild benefits in the most efficient manner.
Get in touch
If you have clients that would benefit from our help, or if you’re interested in working more closely with BlueSKY, please get in touch. Email email@example.com or call us on 0118 9876655.