Pensions are often the most important assets to consider on divorce – and can easily be the most valuable. Separating couples are understandably worried that they:
- Won’t understand
- Won’t have enough
- Won’t be competent to make good choices
The good news is all our mediators dealing with financial cases on divorce are lawyers and familiar with all types of pensions, some have a nerdish fascination with pensions – and all can help you understand them better. Having enough pensions is a different problem!
OK – let’s take an intelligible overview. Imagine pensions are all fruits and have different intrinsic qualities and values per kilo. For kilo read per £1.
Raspberries: Usually the most expensive pensions are final salary, sometimes also called defined benefit. It helps to know the terms – as I think people shut down when they hear a lot of unfamiliar language and actually it sounds worse than it is. Pensions are not rocket science! Anyway, defined benefit pensions give top quality pension income that continues for your lifetime and increases with inflation or latterly the cost of living. They may be based on your final salary or more recently your career average income. However long you live you keep getting the money – these pensions give you the right to an income for life. These are usually the best fruit to have and they are getting rarer for younger people, who often cannot join these schemes, which are mostly now frozen. This means closed to new members and gradually winding down over time and replaced with cheaper pensions. Some people are members of several pension schemes in their job – the older being the most generous and valuable, and the most recent the least valuable, as affordability issues have forced changes to schemes that are cheaper to run. The level of pension income reflects the number of years you have worked and contributed to the pension scheme, the terms of the scheme and rate of accrual.
Your raspberries can be unfunded promises payable from future taxation like the Police Pension or the NHS or may be funded with investments – which may or may not be enough to meet the pension’s promises – more about this below.
Granny Smiths – the apples of pensions: These are the most common pensions and they are sometimes called money purchase and also defined contribution, but it’s the same thing. These pensions are basically a pot of money invested in the stock-market, government bonds and even sometimes property, but they are all based on money and this means they go up and down in value. You can also run out of money – it won’t necessarily last for your lifetime – you should pace the withdrawal cautiously if you don’t want to run out of money. The level of pension income depends on the amount of money in your scheme and how much you take out. If you took out a twentieth of the value each year, you’d probably run out of money, depending on your age at retirement, when you die and the investment returns on the pension fund and charges.
Some pensions are a pot of pips: OK I knew that would grab you! So some pensions are underfunded – this means that the funds that were set aside to pay out on these promises are not enough to pay the promised pension benefits. Some of these underfunded schemes are working hard to get up to scratch and pay out in full – and some can’t do that and instead pass into the government’s Payment Protection Fund (PPF). The PPF will pay out less than the original pension promises – but at least you get something and there are special rules about this. Sort of a sack of potatoes really, not as good as the raspberries you were expecting!
This is a simple rather jokey introduction to pensions – but there seems to be an unalterable rule that people very rarely have enough pensions to meet their retirement needs – and most people put off doing much about this until rather late in the day. At least we can reassure you that we can help you understand your pensions and options – even if we can’t do anything about putting more in the pot!
Call us on 01908 231132 or Email: firstname.lastname@example.org for further information or to book a Mediation Information & Assessment Meeting (MIAM). Read more about family mediation (including our client testimonials) at www.focus-mediation.co.uk