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Mind the gap

Lloyd Fernley

Joseph Lamb

According to recent figures if you are between 40 and 49 years old you are now classed as the most prolific divorcers! If you are in this age bracket and divorcing you will more than likely have personal wealth in terms of assets and pension provision, and as such you need to get it right.

A pension sharing order (PSO) is the most common way to deal with a pension in a divorce, whereby a court will determine how much of the pension of spouse A has to be transferred to spouse B by way of a percentage. However, this process can take a considerable time meaning that by the time the actual transfer from spouse A to spouse B takes place the value of the transfer could be considerably different from that first used in the initial court documents in the divorce. In other words, spouse B may be getting more or less in terms of monetary value because the underlying value of the pension may have changed due to market movements for example. This effect is sometimes called ‘moving target syndrome’.

Let’s consider David and Victoria who are in the process of divorcing. Victoria is due to get a 50% share (£145,000) of David’s pension currently valued at £290,000. Fast forward ten months when the Decree Absolute is granted and the PSO documents are sent off for transfer. Another two months later, the transfer goes through but only £132,500 is received as the pension value has dropped to £265,000 at the time of transfer. It has been known for the transfer paperwork not to be sent off to the pension provider for a long while after the divorce has been granted which can increase the moving target effect vastly. What if David made some high-risk investments in his pension plan since the original values for PSO purposes and the value of the pension is now only £190,000? Victoria would now only receive £95,000 from an original calculation of £145,000 – some 34.50% less. It would then mean that Victoria would have to receive a larger proportion of the other assets under consideration in the divorce to ‘balance the settlement’, which David may be reluctant to agree to.

” It has been known for the transfer paperwork not to be sent off to the pension provider for a long while after the divorce has been granted which can increase the moving target effect vastly “

How can this be resolved? It used to be possible to fix the amount in the PSO, but due to legal challenges this is no longer possible. It therefore means common sense needs to prevail, which can be quite difficult to achieve in divorce proceedings. Try to use valuations as near as possible to the court proceedings meaning that any other financial calculations brought into the proceedings can determine a more accurate and reasonable assessment of the total assets. Also, try to ensure those acting for you (solicitor, accountant, and financial adviser) get the case processed as quickly as possible. It is more than likely that the provider receiving spouse B’s share will want to get the business on their books as soon as possible.

Overall, a PSO is not really that flexible and sometimes struggles to deal with the complexities of the latest retirement products. However with some sound financial planning, and professional assistance on board at the start, it can go a long way to ensuring an amicable and predictable outcome for all concerned.

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