This is the sad story of how someone, intent on running her finances independently of her “ex”, destroyed her personal financial security. It relates to a former member of my family and I am desperately sorry for her, not least because there is nothing that can be done to put things right. If there is solace, it is that she is ignorant of the financial mischief she had done herself – “out of sight- out of mind”.
In a nutshell, this lady took a slit of her husband’s pension in early 2004 , transferred it to a private arrangement and is now some £400,000 worse off for that decision.
Had she not taken the £42,000 transfer value offered her 12 years ago, she would now be entitled to £10,500 pa (in today’s prices) escalating each year at 5% till she took her benefits and then increasing at the better of 3% pa or RPI in payment with a pension for her spouse of 50% if she had died before him. The lady is currently in her late fourties. The estimated value of this benefit today is over £450,000 and rising.
Let’s run through the dramatis personae in this financial tragedy and see if there is some lesson to be learned.
The insistent transferrer
The lady was insistent that no matter what the financial arguments to stay within her husband’s scheme , she wanted nothing to do with him, and that included his pension.
The final salary scheme her husband is still in , is the big winner. It will, by the time this lady reaches pensionable age, have been saved at least half a million in liabilities.
The former husband is upset, aware the ongoing animosity felt to him by his former wife has brought about such financial ruin. There are children involved and the lady has since re-married, so the financial loss is wider yet.
The complexity of pensions
Not all defined benefit schemes are the same. The scheme rules that apply to all members can be improved by individual promises within employment contracts.There are cases of non-disclosure in divorce cases.
But in this case, the scheme rules were clear and there was nothing hidden. Once the slitting order had been agreed, the former husband had no control of the financial decisions taken by his former partner.
I would like to think that transfer values are no longer being taken in such circumstances. That lessons can be learned about the value of guaranteed benefits and the uncertainty surrounding interest rates, inflation and capital markets.
But no amount of disclosure at the point of separation can prevent an embittered spouse from taking a financial decision on emotional grounds.
Indeed in 2004, the prospect of £42,000 taken from a husband’s pension on a pension splitting order may have seemed a triumph.
In the intervening period, his prospective pension has been revalued at 5% pa while the purchasing power of her transfer value has plummeted. She will lose, as a result of her impetuous decision at least 80% of the value of her prospective pension to her and her family.
The oblivious trustee
When a pension is split, the person receiving the split has – for the first time- an entitlement to a pension. This entitlement is not a direct consequence of service with the employer , or of personal contributions made by the former spouse, but as a result of a Court Order.
Nevertheless, the entitlement makes the person receiving the split pension, as much a beneficiary of the scheme as the husband who worked for the sponsoring employer. That is the law.
It might be argued that the trustees were negligent in not preventing the financial calamity that is befalling the spouse but that is to put hindsight in charge.
There may have been a financial adviser in the background – we may never know.
How can a trustee act in the interests of the beneficiary in such a fraught situation?
The harsh reality is that no one knows the financial calamity that has occurred other than the spouse (who worked it out when going through his pension statements).
There is no one to blame, this is an unseen financial tragedy, not even the spouse will be aware of the loss (and I advise my relative to keep it that way).
No happy ending
There is no happy ending. Nothing can be reversed. Like a fine wine, once the cork has been removed there is no going back.
Perhaps the former husband can be relieved that the split pension no longer forms part of his pension assets (as it might have created higher tax liabilities for him under the lifetime allowance, but – knowing him- he would happily have paid the tax to ensure his former wife got proper benefit.
At a purely emotional level, this story proves to me that nothing good comes out of bitterness. If this couple had agreed to work with each other towards what was the best financial settlement for both of them, both of them would have had proper pensions.
Instead, one is no better off, the other finds herself having thrown her golden egg out with the rubbish.
If we do not learn the basic lessons of love and forgiveness , baked into the religions of the world. If instead we live our lives in anger and the hope of revenge, we not only diminish our chances of emotional happiness, we put at risk, through irrational decision making, our – and our family’s financial security.