A woman seeking an equitable divorce settlement risks losing 50 per cent of her defined benefit pension following a ‘poor’ calculation by a divorce lawyer, Carl Melvin, director of Affluent Financial Planning, has said.
The Renfrewshire-based financial adviser said a divorce lawyer dividing up assets between his client and the client’s wife, did not do an estimate of benefit at retirement and performed an incorrect calculation on the woman’s national health service pension.
According to Mr Melvin, the clients’ lawyer based the value of her pension benefits on the cash lump sum she received and multiplied it by four, on the basis that pensions allow 25 per cent tax free cash. Mr Melvin said that final salary pensions were complicated and that it was “simply incorrect” to calculate pension sharing in this way.
He said it showed a lack of understanding of how pensions work and that divorce lawyers needed to understand the boundaries of their competence, and engage with advisers when it comes to final salary pensions in divorce.
“When you look at the assets of a marriage, you look at how big the cake is. From the date of separation you look at the value of the assets – this is what advisers do.
“The biggest concern is whether they will have enough to live on after they separate, so cash planning is the core of our work. Generally speaking, we would advise clients not to do a pension share on divorce, but instead share the value of another asset such as the house.”
It is essential for lawyers to engage with advisers if both professionals are to work to the client’s advantage, he added.
Legal View
Pauline Fowler, partner at London-based law firm Hughes Fowler Carruthers, and fellow of the International Academy of Matrimonial Lawyers, said: “The law treats pensions as part of the assets of a marriage, which means family lawyers are normally involved.
“Pensions on divorce is a difficult and technical area, the lawyer normally needs to work with a pensions adviser or an actuary. The client needs to get further legal advice, the lawyer’s actions are on the face of it unusual, and it may be a necessary need to see if it is possible to amend the order.”
Adviser view
Ivan Hargreaves, a Lancashire-based adviser, agreed, warning: “This vastly undervalued the wife’s benefits in the NHS Pension Scheme, perhaps by more than half.
“Even a cash equivalent transfer value would vastly undervalue the benefits. I am often amazed at the lack of knowledge exhibited by professionals who I used to think knew everything.”
Stephen Womack, consultant adviser at Northampton-based David Williams Financial Planners, questioned the formula used to work out the pension benefits.
He said: “Why would someone look to use a 25 per cent formula when that is not the basis on which the NHS tax free cash is calculated? It is clearly a core part of an advisers’ role to be involved at the early stages of any divorce discussion.
“It is not just pension benefits that are defined to value and having an informed view on how long a cash settlement might last on what sort of income it might produce is essential for either party in a divorce.”
Blair Cann, senior partner at Hertfordshire-based M Thurlow Brokers, said that lawyers should not just consult advisers but also actuarial consultants when looking at the pension benefits of clients seeking divorce.
He added: “This is the best way to value a pension.”
