how to count pension in 20+ years time?

Hi Nigel

Tried clicking on website you put up and got something strange !! Could you put it up again please ?
Am really interested in this thread , not least because as Maggie says , there are hundreds of people going through this right now and making what may well be one of the biggest financial decisions of their lives ­base­d on unclear or vague advice .

shiny

I think there is a rogue full stop preventing Nigel's link working. Try this;


http://www.ancillaryactuary.co.uk

Perrypower wrote - :
" Some reasons why discounting works:
1. Age. Often one party is older than the other. Infact very common for husband to be 5 to 10 years older. If wife is 40 and husband is 50, husband has 15 years to rebuild pension after split to state retirement age. Wife has 26 years"

Why does how long they have to build up a pension after divorce have any bearing on dividing the pension pot they built up during the marriage?
Would the same apply to savings?

The same does not apply to savings as it is in the here and now, you can spend it or save it or put money in. There are no tax advantages etc.

Pensions receive favourable tax treatment. All other things being equal would you say that 26 years worth of tax advantage is worth more than 15? Or to put it another way, would you rather have a coupon for 40% off that expires in 2023 or in 2034?

Perrypower,

Some good points about why some further discounting might be appropriate. However I have some comments on them.

1. Age. As the pension value already allows for discounting for term to payment then I'm not convinced by this argument. I think the need to build of assets post-divorce should not affect the current assets.

2. Tax. I don't think I've said £100,000 of pension only needs £60k in cash. This could only be true for a higher rate tax payer. Tax is complicated and you can't look at tax in isolation of the overall income position.

Remember that the reasons the Government makes you lock up your pension investment is because of the tax breaks it gets: the delay in tax from when you pay contributions to when you get income, the potential to shift paying tax from when you are a higher / standard rate tax payer now to a standard rate / nil tax payer in retirement, the tax-free roll-up of the investment, and the ability to take a lump sum tax-free at retirement.

It would be possible with a view of the entire finances now and projected for the future to make an adjustment for tax. In the absence of this my view is that the value of a pension is usually much closer to its gross value (e.g. calculated with no tax), than you suggest.

3. Inheritance. The pension value allows for any loss of pension on death already, so this has been built in.

4. Utility. I've discussed this separately.

5. Wealth destruction. It is true that the way schemes implement sharing can result in wealth destruction. If as a result of this the settlement is restructured to an offsetting arrangement, then it might be fair to reduce the pension value by half of the wealth that would otherwise have been destroyed. To do this would require getting a sharing calculation done as its not always the case that there is wealth destruction.

6. Personal preference. This is back to the utility point, and I have said that if the parties wish to agree some reduction to the pension value for this reason then that works. What I've said through out is wrong is an arbitrary reduction to 25% of the value from solicitors.

7. Keeping a roof over the kids head. If the issue with a settlement is who gets the house then shouldn't you look at what value you place on the house in the settlement, not make an arbitrary alteration to an entirely different asset value?

8. Risk. The chance of a pension fund defaulting entirely is low: and there are various guarantee schemes in place to protect most of its value. And pension schemes are not alone in have a chance of defaulting: even bank accounts are not 100% safe. I think this is very much a second order item.

Thanks Nigel, I agree with what you are saying, but I stand by the points as having merit in themselves. The question I think we both share is why such deep discounting?

If the discount was 25% I could see it readily, but 75% as a norm really surprised me. Hopefully DL can shed some light on the history/thinking for the approach that is taken.

It is very complicated and there are many valid arguments either way.

I think I'd put it that in some circumstances some adjustment to the market value of the pension (an appropriate actuarial value, not the CETV) might be right. However, my starting point would be no adjustment, and any alteration would have to be set on a case-by-case basis and not arbitrarily. I certainly agree that reducing the value by 75% is wrong.

As has been pointed out the same arguments apply to other assets. So for example the FMH might have a greater than market value to one, or even both parties. Also a FMH is not a liquid asset (I've been trying to sell mine for 3 years so can evidence this), and the cost of sale of a house / purchase smaller property(ies) might reduce its value. So altering the market value of the FMH is equally valid.