With the Financial Services and Markets Act compelling solicitors to become FSA regulated, pension issues on divorce will throw up even more opportunities for advisers
Pensions have become an increasingly important asset in the event of matrimonial breakdown and how they are treated during a divorce has taken on greater significance since the Pensions Act 1995 and the Welfare Reform Act 1999.
After the family home, pension funds are frequently the largest capital asset of the marriage. However, pension provision between spouses is rarely equal and women may have little or no pension in place as the result of giving up work to raise a family.
When divorce happens, women can often be left with inadequate pension provision. Previously, courts would offset the value of the pension against another matrimonial asset, such as the family home. But this was never a satisfactory solution. Frequently, the wife would have a home but there was no provision to support her in retirement.
Earmarking was introduced in the Pensions Act 1995, allowing the courts to set aside a proportion of all future benefits for the wife. But, once again, there were a number of disadvantages to this method.
First, the wife needed to wait for her husband to retire before she could receive benefits and, if he died before retirement, all benefits payable to the wife would be lost. Second, the propensity to vary benefits years down the line meant this did not offer either spouse a clean break since both were still liable to further claims on the pension.
The Welfare Reform and Pensions Act 1999 was devised to give the Courts greater powers when dealing with pensions in divorce. The pension splitting rules introduced in December 2000 allow a wife to claim a proportion of her husband's pension and receive benefits completely independent of him.
Depending on the assets divide, the pension will be split proportionately. If the courts have granted the wife the bulk of the couple's assets, it is therefore unlikely the pension will be split 50:50. Pension splitting allows the asset to be split into two, effectively creating two individual pensions and thereby avoiding the problems associated with earmarking.
Pension splitting does not automatically entitle a spouse to claim against the value of the pension fund, however, and they must make legal representations that would justify them receiving any such benefit. The spouse has to prove he or she would need a future pension to support them in retirement. They will have to demonstrate a need for pension provision, rather than claiming on lost benefits.
There is significant opportunity for advisers to link with solicitors over pensions and divorce. Solicitors are obliged to consider many factors when establishing the estate's worth and matrimonial separation.
Working with an adviser on the assets can add value to the settlement by using their services in deciding which assets to keep, sell or transfer. This is important as many clients may not have previously looked after their own financial affairs.
Clients may require income from these assets and need advice on which investments and taxation considerations should be met for the optimum financial planning solution.
The value of advisers in investment solutions has increased under the Financial Services and Markets Act (FSMA 2000), which has compelled solicitors to become FSA regulated or reduce the scope of investment advice they offer their clients.
Since the introduction of the Welfare Reform and Pensions Act 1999, the number of solicitors looking for suitably qualified advisers that specialise in pensions has increased. The need for specialist and independent advice looks set to increase again as divorce petitions filed after December 2000 come closer to completion.
The synergies are readily apparent. Solicitors can benefit from the added value that advisers can bring to a pensions and divorce settlement while advisers can benefit from offering solicitors' clients first rate financial advice. This can lead to further client referrals which, in turn, can help advisers build their businesses.
Moreover, professional relationships can generate higher quality referrals ' clients with complex needs. These clients may need professional advice requiring the differential but complementary services offered by solicitors, accountants and advisers. This, in turn, can lead to further introductions in other areas requiring advice, leading to a virtuous circle where professionals and clients benefit.
As people live longer and pensions provision becomes more important, so the need for fair valuation of pensions in divorce will increase. For those advisers who have the training, determination and professionalism to operate in the market, this will provide an opportunity to both build their business and, more importantly, offer first-rate services to their clients.
Nick Kidbyw is pensions and divorce specialist at Inter-Alliance
Advisory opportunities surrounding pensions and divorce
Providing advice to family solicitors
• Family solicitors will need practical help and guidance in understanding all the
various forms of pensions and how they operate in practice.
• Advisers can also help solicitors obtain valuations.
• Pensions sharing allows advisers to develop valuable professional connections, which may lead to other business opportunities.
Providing advice to individuals
• Both husband and wife will need initial guidance on the options for allowing for the pension or divorce.
• If pension sharing goes ahead, then spouses of those in private funded schemes will need specialist advice on what type of arrangement to transfer into, as well as selecting the most suitable provider.
• Where there is also the option of joining the member's scheme, the advice becomes even more complex.
• Finally, once the transfer has been completed, both the ex-spouse and the member may need further advice on financial matters. Both in their different ways should consider how to make up lost pension rights and identify future needs.
Providing advice to trustees
• Trustees will need advice and guidance on highlighting necessary amendments to scheme rules, helping to implement procedures to follow when informed of a possible divorce, or when asked for information or receiving an order.
• Procedures must reflect the timescales trustees must work within. It is also important to communicate the potential fines from Opra for failing to comply with the requirements.
• One important area where advisers can advise trustees is whether they should offer ex-spouses scheme membership as an alternative to an external transfer value.
• Trustees will also need advice on whether to charge the divorcing couple and, if so, how much. They will also need help in deciding how best to communicate this.
Source: Scottish Life
Paul Bruns and Elaine Parkes
3,000 left to transfer
Record numbers of people aged 90 plus
From 3 to 10 October