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.
I don’t have AF3/G60 and even if I did, I dont know if I would apply for transfer permissions. As a generalist adviser I prefer to be very close to my small number of clients and look at the overall planning issues and contract out occupational transfer advice so someone else doe the number crunching and I discuss the outcome with the client. As a result I have had very few clients recommended to transfer and none transfer contrary to a recommendation from the G60 qualified firm.
With regard animosity resulting in poor decisions, I have also seen the reverse where divorcing couples got on so well, they amicably agreed pension splits, arranged them themselves without advice and it was several years later the spouse who gave up 50% of their armed forces pension found that the way it had been structured, they actually given up pretty much the whole thing!
Specialist advice for divorced on occupational schemes is essential and money well spent.
Henry, it is increasingly the case that Scheme Trustees no longer accept “earmarking” or “attachment” orders in divorce cases. That was certainly the case with the last three I dealt with. Instead, a CETV is offered, period. You are right in that it is, more often than not, the woman that is awarded the “splitting” of the fund as she may well have had a career break with children. Interestingly, most DB transfers in divorce cases nowadays represent a very large amount of money to the lady in question, something that she is not used to dealing with. Most IFA’s will only get involved when a solicitor asks for help and our job is then to describe the various options available once a transfer has taken place, i.e. “where do I put the money”.
Increasingly, the cases that I have looked at have been from DC schemes which, clearly, is a little easier. My own sister was awarded all of her ex-husbands tiny personal pension fund a few years ago and I just advised her about a suitable home for it.
Going back to DB pensions and divorce, I think it problematic when the Trustees say “OK, this is what the court has said, you get 60% of hubbies fund (note, not benefits), so where do you want us to pay it?”
The last large case I looked at concerned an insurance company executive and he lost 73% of his DB pot to his now ex-wife. The sum was substantial and the lady in question, has taken a small pension under flexi-access so that she can complete a PhD at age 56. The pension fund, held in a “proper” SIPP has produced returns in excess of my conservative expectations, and the amount being drawn down is only about one-quarter of the “natural yield” of the portfolio. My client actually thinks it is a “win/win” situation for her and her own DB benefits were unaffected by the divorce.
I would suggest that you relative was an unfortunate victim of circumstances and, perhaps, had a weak solicitor.
My ladies, and they are all women so far, that have been recipients of pension sharing orders have all done pretty well with what they have got, purchasing houses, paying off mortgages, drawing a reasonable pension, building a fund for the future, etc.
It really isn’t all “doom and gloom” moving from the DB environment to DC, as long as the numbers are sufficient and things are carefully negotiated and managed.
Best,
You do seem to be comparing apples and pears, Henry.
£42,000 invested for 12 years at 6% net would have doubled in value; at 9% net near tripled. Both a long way shy of the likely current transfer value, tho’ not quite as extreme as you suggest.
But I agree these net rates of return may bear no resemblance to actual returns, although I have seen the latter with some well-run DB pensions (even BHS trustees achieved/averaged over 8% pa from the early 2000s till 2014).
I’m also struck by how generous the husband’s pension, even after split, seems to be. Apart from the risk of PPF capping for the member (which is the subject of a legal challenge elsewhere), this kind of benefit just may not be sustainable and is possibly already being cross-subsidised by shareholders’ contributions, and if it’s a contributory scheme, by active members. I don’t agree with upping the transfer values generously either, as again the funding for those may fall on the shareholders and the contributing or non-contributing members left behind.
I’ve no idea what happened since the transfer but the problem’s less with asset growth – than what the assets can buy! As I’m sure you know George. She may have had the good fortune to buy at the right time, but it’s amazing how few people seem to get lucky in that!
Who advised on the splitting order?
I suppose the solicitors John
Solicitors who carry “professional indemnity” insurance for just such occasions, but many clients, former or otherwise, simply won’t claim.
And Henry has confirmed he does not wish to contact the losing party to draw attention to this issue. But perhaps her ex could?
But transferring from DB to DC surely requires financial advice?
Not if you insisted in 2003!
This article raises very interesting questions as to the trustees responsibilities in relation to such transfers.
The same issues apply in relation to other transfers including benefit conversion to annuities or other alternatives.
Trustees generally attempt to act in a members best interest. But have they got a further role to play in relation to decisions made by members? And especially the role of advisors to members for those pensions.
Could this also include vetting advisors to be used by members in relation to their pension pots. This may be more valid where such advisors are already acting for the Trustees such as the registered administrators.
On a separate issue the calculations appear a little odd to me. A 45 year old TV of 20 times the planned pension? while the original TV chould now be approx $100k
In the period TVs have gone from 10 to typically 30 times multiples , because of the guarantees in payment – this one looks like around 45 time multiples. Stock market growth in the past 13 years has not been great, inflation has been low but the most important factor is the 5% revaluation of the pension against minimal inflation.
It’s a perfect storm working against the transfer value but it’s real enough.
Pension sharing is part of established law (I’m not sure, however, that Trustees can refuse to implement an attachment order), and the practice involves:
a) The legal principle that a “clean break” is high on the priority list (not available via attachment)
b) Deeming the share to have notionally left the scheme before the share process is commenced:
c) Where a report is produced, instructing the expert to equalise BENEFITS at NRA.
Interest rates were around 5-6% when the share was effected, and no-one predicted that incompetent governments would have allowed banks to crash the economy to 1/2% – then keep it there for over 7 years.
The 30 year gilt bull market, and error of those who thought it would be mean-reverting, brought about the pension mis-selling and Equitable Life fiascos, as well as this unfortunate case.
Sorry – in b), the first “share” should read “sharer”
Henry and all those who have commented here – you may be interested to know that a very high level Pensions Advisory Group has been established: you can read about it here –
and the group would be very pleased to have comments about these issues to feed into the deliberations: https://ageingissues.wordpress.com/2017/10/20/the-pension-advisory-group-developing-guidance-on-pensions-on-divorce/