When relationships end: Getting protection and pensions right

Shelley Read (00:00-33:37): Hello everyone and welcome to the latest webinar from Royal London. Today's is a joint pensions and protection one, and we are going to discuss getting protection and pensions right when a relationship ends. I'm Shelley Read and I'll be covering the protection side and Fiona Hanrahan the pension side. We are both senior technical managers here at Royal London, and in this session ‘When a relationship ends’, we will explore both divorce and separation of unmarried couples.

Now on the protection side, I'm going to focus on divorce being a key trigger in protection planning. This really, in my opinion, isn't just an admin exercise. It's an important reset of financial risk, financial resilience, and also client intent. I look at how to identify gaps, risks, and the opportunity to review and restructure your client's protection portfolio. On the pension side, Fiona will explain how pensions are treated when a relationship ends and answer the most common questions about pension and divorce.

Now, if you're listening live, you'll be able to ask us a question during the session, and we'll get back to you as soon as we can. Following the session, you'll be directed to a short quiz. And after answering the questions correctly, you can download your CPD certificate. If you're listening to a recording, you'll see the quiz on the same page that you access this recording. And please get in touch with your usual Royal London contact after the session if you have any questions. So, let's get on with the webinar then.

So, as you would expect, we have some learning objectives. So, after this session, we hope that you'll be able to recognise and manage client risks post-relationship breakdown, confidently use suitable restructuring strategies and clarify pension treatment after separation. Also answering any key questions related to divorce.

So, let's get started and look at how important a consideration protection is when a couple decide to separate. Now, why does divorce matter? Well, divorce significantly alters financial dependency and also insurable interest. Policies that were appropriate during a relationship can quickly become misaligned. One of the biggest risks is that benefits are paid to unintended recipients, which could be an ex-partner, and more often than not, this is not the wish of the policy holder.

Now when children are involved, protection becomes even more critical. Maintenance payments, whether for a spouse and/or children, represent a financial dependency. And if the paying party dies or becomes ill, that income might stop. Remember, this may be all or a large percentage of the other parents' income, but life and critical illness cover, however, can be structured specifically to protect these commitments. And we'll look a little closer at that in a while.

Remember that added value support services available with most modern protection plans can be really important. Now offering such things as counselling that could be to both parents and children, and also legal advice and support. Now post-divorce affordability is often under pressure. In the main household, income is typically reduced as two incomes that previously funded one household may now have to support two, but as you, I hope you can see protection needs may actually increase. So, I think the key message here is that reducing cover is often better than cancelling it all together if those monthly finances are stretched. But again, your advice is so important to help clients prioritise what protection remains essential.

Now divorce settlements may include legally binding requirements around protection, such as maintaining a certain level of life cover or writing policies in trust. So, it is imperative for you, again, as advisers to ensure that any existing or new arrangements align with court orders. There may also be a requirement to provide evidence that cover is actually in place and is maintained.

And finally, reviews of protection policies I think are especially important after divorce or separation. Because the client's financial risk responsibilities and their intentions often change very quickly. There may be a new relationship and family to protect and once settled into a new household budget, appropriate protection should be reviewed. But like any household things can change within a short time that needs a review of protection and suitability.

Now on the next slide, let's have a look at some protection triggers. Now, with regard to what you can see on screen now, we can see what I think are some triggers that we often talk about that could merit a protection conversation. Now, divorce and separation are obviously included here, but also things like cost of living concerns, a new baby, or reviewing trustees, which we will come back to a little later, and even remortgaging or a promotion at work. All these events could mean an update to protection plans is required.

And if you can educate your clients to get in touch for any of these life events, that really will go a long way in ensuring adequate protection is in place to secure the best outcome for your clients should the worst happen.

Now on the next slide, we are going to look at policy ownership. So, over these next few slides, I'm going to look at how really important it is to consider the ownership of a policy. It is a key consideration, particularly after a separation. Now from a protection perspective, divorce or separation is as we've seen, a trigger event that can materially affect risk exposure, policy suitability, and beneficiary outcomes. So an important thing to consider is policy ownership.

So, I would ask you to really consider the following points as to who legally owns the plan, who is actually paying the premiums, who has authority to amend or cancel a policy? And don't always assume that this is jointly controlled. We'll look at this a little bit more in just a moment.

Now, on this slide, you will see that the Critical Thinking Report by CI Expert just published only in March of this year, show that 68% of couples assume that joint cover offers better protection despite the fact that only 12% say that they understood the difference. Now also 51% of couples said that single life policies offer better overall protection and value after a simple explanation of the difference. And I think I am really inclined to agree.

Let's move to the next slide and let's see why. Now, here I have summarised some of the benefits and also considerations when advising about taking either a joint or two single policies. Let's first have a look at the left-hand side of the screen and look at the benefits of two single policies, and I think even more importantly, two single policies which are actually individually owned. So, what are the benefits? So, if a claim is made, the other policy remains intact, and this is super important. If the other party has experienced any health issues, which could make taking out a new policy more expensive, or it might not even be possible at all, and were both parties to die together, there would be a payout on each policy so double the amount of cover. Now, a breakdown in relationship means that in this example, each party could take their own policy with them. And again, very important, only the policy holder can cancel or make changes to the cover.

Now, multi-cover plans could offer a mix of individually owned and also jointly owned plans within one menu or multi-cover plan to suit really the client's specific situation at that time. And when looking at where the money is going to go at claim, single policies could utilise the very simple beneficiary nomination route. But consideration should be given to the fact that multi-cover plans with different ownership may require several trusts to achieve policy holder wishes and premiums will be slightly higher for two single policies.

Now if we move to the right-hand side of the slide and consider a jointly owned policy, what are the benefits here? Well, they are well designed for shared financial commitments such as a mortgage where there is one set debt to protect. The premium cost, as we said, should be lower and simplicity. One policy, one premium to manage, one policy to review and one renewal date. But there are also considerations. There will only be one payout at a claim, and one party may just not be aware about missed premiums or a policy lapsing, and it can be easier for mismanagement of the policy if a relationship breaks down acrimoniously.

Now I thought this next slide was interesting considering what we're talking about. This is taken from, again, from the recent Critical Thinking Report, and advisers were asked when recommending two single critical illness plans instead of joint, which benefits do they most emphasise to clients? So clearly at the top, and this may be the same for you, 70%, was that there are two chances of payout if both parties suffer a critical illness followed by the policy not ending if one claim is made and two lots of children's critical illness cover and also over a quarter said it offers better long-term value as the cost difference is so small, which we know value needs to be demonstrated. And this is another opportunity to do this.

Let's have a look now where children are involved and a parent or guardian is paying or receiving maintenance. Now as I mentioned earlier, when children are involved, the consideration of adequate protection becomes even more crucial, never more so than when maintenance is being repaid. Consider then if the paying party dies or becomes seriously ill, that maintenance income might stop. And as I said previously, this might be a large proportion of the main child carer’s income.

But life or critical illness cover can be structured specifically to protect these legal financial obligations. And as we move on to the next slide, I'm sure many of you know what I'm talking about here. I'm talking about a specific insurance product called Family Income Benefit (FIB), which is really the perfect solution to protect these maintenance payments on death or diagnosis of a critical illness.

So I'm just going to remind us of exactly what Family Income Benefit is. So, in a nutshell, it's a simple term assurance policy, and at least with us at Royal London, it can be set up to pay out on death or critical illness. And rather than paying a lump sum, it pays out a monthly income until the end of the term of the policy.

Or having said that, it can be commuted to a lump sum on claim. But in my opinion, FIB should always be set up with the intention of it paying a regular monthly income to, in today's presentation, to protect these maintenance payments.

So good news, the income is paid tax-free. The sum insured can be set at a level or indexed basis. Now, I'm not the adviser on the webinar today. You ladies and gents are, but I am of the opinion and hopefully you'll agree that if we’re setting up an income-based plan, then it's always a good idea to at least consider indexing those benefits or it may not be fit for purpose if a claim is made further into the plan. Now, policies can be set up on a single, joint or dual life basis and dependency on the complexity, it can be written either in trust or by nominating beneficiaries. And of course, Family Income Benefit will also provide access to support services for the policy holder and their immediate family.

And what I'd like to do next is to show you what a real difference Family Income Benefit can make to a family if the worst happens. So, to help me do that, let me introduce you to our Royal London fictitious family. We've got Laura and Chris. They’re young at 28 and 32 or they are compared to me. They have two dependent children, Alfie, five, and Maisie, three.

Laura and Chris own their own property, which has an outstanding mortgage of £175,000, and the remaining term on this mortgage is 25 years. Laura is a part-time civil servant earning £15,000, and Chris is a nurse earning £40,000. They're both non-smokers with a planned retirement age of 67, and their monthly outgoings are a little over £2,640.

Now let's have a look at really this, a spotlight on Family Income Benefit and how it would impact the outgoings of this family. Now, this first sort of column is probably in happier times when the family are all together. You can see here we've got normal things for a family household as far as outgoings, mortgage, insurance, utility bills, cars, credit cards, groceries, all the sort of things that we are very used to spending.

And for Laura and Chris, this comes to £2,643. Now their income comes out at £3,886, so you can see they've got quite a healthy surplus every month there in green of £1,243. Now if Chris died suddenly let's assume they've got some mortgage protection in place. So, they paid off Laura's mortgage.

You can see that many of the utility bills and household expenditure each month, is not really going to change that much. And now we've only got income from Laura coming in. There's no Family Income Benefit being paid. And you can see here in red with Laura's part-time income. Even with that mortgage paid off, we have a slight deficit of £196.

Now in the final column, let's look at what would happen in that same scenario. But this time we've got family income benefit of £2,500 coming in every month. So again, the mortgage has been repaid. Those outstanding monthly commitments are pretty similar. And now we've got income for Laura of £1,193, Family Income Benefit, because sadly Laura's ex-partner has passed away, of £2,500. So we've now actually got a much larger surplus, £2,304. And this might well give Laura some choices as to whether she wants to continue working. Or indeed it looks as if, currently anyway, Family Income Benefit would cover their outgoings, you know, quite comfortably. So hopefully that's shown you what a difference having that Family Income Benefit in place might be.

And on the next slide I'm just going to use a model that we've come accustomed to in the trust world of right hand, right time, right money. And these are just three suggested questions to ask your clients about what would happen in this situation.

So, if something happened to you, who would need financial support? So that's obviously right hand. When would they need that support? Immediately or over time? Clearly, we are looking at the time question there. And what type of support would work best? A lump sum, maybe some income or both. So obviously that concentrates on the right money section.

Now on the next slide, we are going to look at trusts and nomination of beneficiaries. Now, I think this becomes particularly important after divorce because they give, as we know, control, certainty and protection as to how life insurance proceeds are going to be handled. And this is especially important when family structures have changed and financial responsibilities have also changed.

So achieving good outcomes, where does the money go from a life insurance plan? So, let's just remind ourselves of the options so the funds could go directly into a person's estate. And as you know, for many reasons, this is often not ideal. The money may not go to the beneficiaries you intended it to. There could be lengthy probate or, up here in Scotland, confirmation delays, and it could trigger an Inheritance Tax liability.

It can be set up under life of another as we see this sort of slide build. But for me, either writing a plan in trust or through beneficiary nomination can adapt to changing circumstances such as a child's needs changing as they grow up, and also to protect vulnerable beneficiaries. And importantly, I think, decide proportions of a payout. And I think this is particularly valuable when we've got blended families following a divorce.

Now again, using that right hand, right time, right money model. On the next screen, I've just put a few questions together to help determine the best option for where clients would want that money to go. So, is it important to you that the people you want to get the money from your life assurance plan, get it? Obvious question, but right hands. Is it important to you that they get it quickly when bills and financially stress are often immediate, obviously right time. And is it important to you that the plan doesn't add to or create an IHT liability, which as we know can be up to 40% of your estate, looking at the right money.

So, let's move on now away from trust but really linked and have a look at wills. Now, why is it so important to update your will on divorce or separation? So having a will during and after divorce or separation in my opinion, is not just good practice. I think it's a critical legal and financial safeguard. So, divorce, as we know, fundamentally changes your legal relationship. But remember, your will does not automatically keep pace in a clean and complete way. But good to note here though that a remarriage will normally revoke a will but remember cohabiting partners have very limited legal rights.

So, there is a risk of unintended beneficiaries or intestacy if we don't update a will. And remember, with intestacy, your estate is distributed under strict legal rules. And these rules really do not consider personal wishes. They don't consider stepchildren or cohabiting partners.

Now children's inheritance may lack control or protection without a will. And protecting children does become more complex post-divorce or separation. And I think a will is essential here for appointing guardians to control when and how children inherit.

And remember, an ex-partner could still have indirect influence. Without a will, your ex-partner could end up controlling money intended for the children. So, in summary, reviewing and rewriting a will to protect assets, safeguard children, and ensure that wishes are followed.

Now I mentioned in here guardianship. And I think this becomes a critical consideration alongside protection policies after divorce or separation because the person raising your children may not be the same person controlling the money inherited for them. So, if both aren't structured properly, the policy might fail in its purpose.

So again, I put together a few possible questions you could ask your clients to determine their thoughts on guardianship of their children. So, who would look after your children if anything happened to you? Clearly then we are looking at the right hands. Would these people be well enough to look after the children until they're 18?

We are really looking there at the timescale involved. And would they be financially able to take on such a responsibility? Again, we are looking at right money there. And is there a need or opportunity to set up a protection policy to take care of the children by means of the guardianship?

So, I think the key takeaway here is guardianship determines who raises your children and a life assurance policy in trust or beneficiary nomination determines who controls the money that funds this upbringing. So, after divorce or separation, deliberately coordinating these roles is essential.

So, who has parental responsibility? Just very briefly, I wanted to mention this. This is a flow chart from our adviser literature section on the Royal London Adviser site. I think it's important to familiarise yourself with this, and we have flow charts for England and Wales, Scotland and Northern Ireland. But I think it's important to note that unmarried fathers, step-parents and grandparents don't automatically gain parental responsibility. And blended families here could create really competition and competing expectations as to what would happen.

So, let's now move away from wills, trust and guardianship as we focus on a really important area of affordability. So dealing with breakups and looking at affordability. Now, post-divorce affordability is often going to be under pressure. Household income is typically reduced, but as we've seen, protection needs might actually increase. So, I think the key message here really is to make note really that often reducing cover is better than cancelling it altogether. And an adviser's role here is so important to help your clients prioritise what protection remains essential, and also to regularly review the suitability of that protection. But without doubt, during and after divorce or separation, protection remains key.

Now, vulnerability and safeguarding economic abuse is a recognised form of domestic abuse, and often involves coercive control involving restriction, exploitation, or even sabotage of financial resources. Now in this context, we should treat life policies as an asset that really can be manipulated, not just a protection policy. So, I'd ask you to be aware that divorce and separation can coincide with domestic abuse, including financial or economic control. So, look out for signs that a client may not have control over their finances and they may not have control over their protection policies. You may even see some coercion into taking out or indeed altering a plan. And remember, life assurance is set up to give peace of mind, not to become a weapon used to threaten or blackmail someone.

And in these circumstances, when a relationship ends, the priority is to ensure that the victim is fully in control of their protection plans. The perpetrator of economic abuse has, no longer, any access or influence, and most importantly, if there are any children, they're properly protected. And in the event of a claim, any proceeds go to the right person. All of these above actions will align closely with the FCA vulnerability obligations.

Now, if you want to know more about financial services and economic abuse, Fiona and I will actually be tackling this really tricky but very important growing issue in next month's Royal London webinar. So please look out for details coming to you in May.

Now as we come towards the end of my part of today's webinar, let's just address a few additional considerations. So, the purpose of cover. Every protection policy is set up with a purpose, typically a mortgage protection or income replacement, or family security.

So as we've seen, divorce fundamentally changes those needs. For example, one party may retain in the home or income protection might become even more important if there is now a single income supporting dependent and no second income to fall back on. I would suggest always revisiting the original rationale.

Now, employer-based benefits are frequently overlooked. Death in service and group income protection schemes often rely on nomination forms, which may still name an ex-partner. So, encourage your clients to review and update their wishes with HR at their workplace. And this really is a quick win, but it can prevent significant issues either now or later on down the line.

Now professional connections. There are many professional connections who also support clients facing a relationship end. So, it may be worthwhile collaborating with these professionals locally to provide support, avoid extra work later, and also, there's those possible referral opportunities. So, for example, family lawyers, they're specialists in financial settlements and maintenance.

So they could often require life cover to secure those maintenance payments. And also, they may need policies to be written in trust. Will writers should ensure an alignment between wills, trusts and protection policies, and also consider guardianship arrangements.

Now, pension and wealth experts. We know that pensions can be one of our largest assets and outcomes here can directly affect retirement planning. And in just a few minutes, Fiona will look at this more closely for us. And mortgage brokers can play a big role when a relationship ends. For example, assessing affordability on one income and lending decisions will often run parallel to divorce finalising and settlement, and added value support services. Remember, these support services offered with most protection policies can provide invaluable support to all the family during a life event, such as divorce or separation. And these can include things such as counselling, extra support for children, a legal helpline, and even holistic remedies to help with wellbeing.

Now let's just wrap up with some additional planning points. We know that life rarely stands still, and protection should change as family responsibilities, mortgages and relationships evolve. Consider plan ownership, who owns the plan and how benefits are paid can be just as important as actually how much cover is in place.

Now, liquidity for guardians. Do guardians need to give up work or reduce their working hours? Would they incur additional childcare and living costs? So is a protection policy required here to provide that financial safety net. Highlight added value support services. We know that these support services can be just as important as the payout when families are under pressure. And focus on the outcomes. Who receives the money, and how quickly is critical. Trust and beneficiary nomination shouldn't be seen as optional extras. And professional connections, building a reliable referral network improves both client outcomes and your advice recommendation.

So, this brings me to the end of all I wanted to talk about today regarding divorce and protection. Thank you so much for listening over the last 30 minutes or so, and I'll now hand over to Fiona to look at pensions and divorce.

Fiona Hanrahan (33:38- 1:01:55): Thank you so much, Shelley, that was amazing. And now I'm going to look specifically at the treatment of pensions when the relationship ends and it's more focused on a marriage or civil partnership coming to an end as there's simply less access to a partner's pension fund at the end of a relationship if it isn't a marriage, or a civil partnership. So, to be clear, when I'm talking about divorce or pensions and divorce, I'm also referring to civil partnership dissolution as well, but for ease, we're just going to say divorce or pensions and divorce throughout this section. And I want this to be as practical and as relevant as possible for financial advisers so, I'm going to begin by outlining the three options for dealing with pensions when a couple divorces. We'll look at what types of pensions can be shared, including any potential to share elements of the state pension.

And then from there we'll share the most common questions that we get around pensions and divorce. And, you know, we've got some input from our pension technical department as well in this respect. I think it's really useful to, you know, see what your peers are asking us too.

And then we'll finish off by looking at how advisers who aren't PODEs or pensions on divorce experts how they can help too. And if PODE isn't a term, you're familiar with it, as I sort of said already, it's an acronym for Pensions on Divorce Expert, and it's heavily referenced in the ‘Guide to the Treatment of Pensions on Divorce’, the most recent edition of which was published by the Pensions Advisory Group in 2024. There's a screenshot of it available there for you to have a look at and it's a really valuable document for anyone involved in this market and there'll be a link in the post webinar information for you to look at.

But, you know, I'll warn you, it does go into a lot of detail around how PODEs, pension on divorce experts, should value things like defined benefit schemes and most financial advisers are unlikely to want or possibly even have the skillset required to be a pension on divorce expert. So, while it's important that advisers are aware of PODEs what they do and when their expertise should be sought in the divorce process. This presentation is really aimed at helping advisers who aren't pension on divorce experts, understand the value they can add when a couple divorces.

Okay, so let's begin with those options. There are three options for dealing with pensions in a divorce, offsetting, ear marking and sharing, and we'll talk about there is, I guess, in theory, a fourth option not taking pensions into considerations at all and this really isn't allowable. However, there is, you know, surprisingly recent instances of this still happening. You know, just make sure it's not someone in your family or one of your clients.

It's important to note, however, that whichever option is eventually taken, proper valuation of the pension assets will still obtain the fairest deal for your client. And the valuation is important regardless of which option you know, you are going to proceed with. The valuing of pensions is most difficult when defined benefit pensions are involved. And while the, you know, the actual valuation of these is likely to be something a pension on divorce expert will need to be involved with, you could still play a major role in the process, including helping identify when one of those experts will add value or is required.

So let's start with offsetting then. This means, you know, broadly everything is valued and a very basic example would be one party keeps the house, and one party keeps their pension. So, the pension remains, you know, as it is. It’s still the most common option as it allows a completely clean break between the divorcing parties and avoids the cost and inconvenience of going to courts to decide the splits of assets. It can also avoid the need to sell and split the treasured possession; however, it involves choices such as foregoing pension assets in favour of something else, normally the family home. And here we need to remain mindful that the person not getting the pension asset is likely to have a retirement income need still, and they need an adviser's help potentially to understand what they will need to do to achieve that retirement income that they were aspiring to, which will obviously now be affected.

There is, however, a perception among some clients that offsetting actually prevents their spouse from getting any value from the pension at all. But really that value will simply have been offset against something else. The, you know, the spouse will have received the value of that pension just in a different form.

So in many cases, offsetting will be the chosen option, except where the pension fund represents a very large proportion of the matrimonial assets, and you know that's entirely possible in this situation. The client may simply not have enough in the form of other assets to offset against the share of the pension. And this is something that, you know, has become more prevalent with large transfer values from defined benefit schemes in the sort of near past. So, people are having to look at different options.

A couple of points to note about offsetting are, firstly around the taxation when you're trying to work out the value of matrimonial assets, whether that's for offsetting or anything else. We do need to be mindful of the tax treatment of each of the options. We need to consider whether an asset is subject to income tax in the hands of the recipient, a pension, for example or not going to give rise to income tax, the family home for example. A house and a pension may have the same value on paper, but once income tax on the pension is factored in, that may not be the case.

And this may be particularly important if large lump sums need to be withdrawn from the pension, for example, for a deposit on a house. In this case, some or all of the pension benefit could be subject to higher or even additional rates of tax. Another point it might be worth raising with family law professional connections you deal with is in that guide to the treatment of pensions and divorce that I talked about it says ‘where there have been claims of negligence made against family lawyers in the field of pensions, it has overwhelmingly been in cases where offsetting has been the chosen remedy, not pension sharing’. So, if nothing else, this suggests to me that solicitors involved in divorce cases involving pensions need to give closer attention to the sort of nuances of value pension assets for the purposes of offsetting.

The final point to say about offsetting before we move on is more of an emotive one, but just as valid as the sort of facts and figures is, divorce is usually traumatic for all concerned, and although the proportions perhaps won't be as high as they were in the past, women in opposite sex relationships are still likely to remain the primary caregivers and have the children a greater proportion of the time. Obviously not in all cases. As a result in the past, women have possibly felt a greater compulsion to keep or try and keep the family home, perhaps to maintain an element of stability for the children of the marriage, even if this has meant not getting a full 50% share of the overall assets or perhaps with minimal benefits to use in later life.So if you're dealing with clients in this situation, just be mindful of the best solution to meet both their, you know, short and long-term goals too.

So, to recap, offsetting then. It's popular, it often keeps costs down. It allows for that clean break that most divorcing couples are seeking I'm sure. But an accurate valuation of the assets is just as important as in the other options that we'll go on to discuss.

The next one is earmarking or attachment order, which were actually the first option to become available after the Pensions Act in 1995 made it necessary to take pensions into account in a divorce. It's fair to say though that attachment orders, used to be called earmarking, are not the favoured solution of the law society. And the main reason for this is that attachment orders you know, don't transfer that ownership of any pension to the ex-spouse so there isn't the clean break. And this means that the member still has full control, subject to what the trustees will allow over how the pension is run. So they could stop making contributions. They still control the investment options, which may result in choices which are disadvantageous or unpopular to the other party. And also, they could delay or defer taking the benefits indefinitely, which means the other party doesn't actually get to access them when they were expecting to.

And also the member may die before their retirement and unless the death benefits are specifically attached or earmarked the spouse won't actually receive anything. And it's also possible that the order will cease in the event of the ex-spouse's remarriage. So, you may also need to be wary of the wording of attachment orders since pension freedoms, as they may state or have historically stated something like, the spouse will receive 50% of the maximum lump sum available. And that was of course fine at the time when it was written and would've been intended to be 50% of the tax-free cash or PCLS. But since pension freedoms, the maximum lump sum available would be if the member cashed in the entire pot potentially.

So could the member actually, you know, be forced to do this? All that said, the disadvantaged attachment orders do still potentially have their place. For example, if one party is much younger than the other, and would have to wait a long time to access benefits in a pension share because they need to wait till they're at least 55 and they can be useful to provide life cover too, for example, so that other maintenance payments too can be continued in the event of the member's death.

Also remember, you can change the wording of attachment orders. You'll need to involve a lawyer or solicitor to write a variation order. And also, since the year 2000, it's possible to change an attachment order and convert it to a pension sharing order. So, you know, these are options that are well with checking with your clients if they got divorced a long time ago and tighten up any loosely worded attachment orders or even update them to a pension sharing order.

The final one to discuss is pension sharing, and it certainly has the benefits that you can see in the screen in that it creates that clean break that we said most couples probably want. Once the recipient has received their share, it belongs to them and they can access it subject to the standard pension rules, as they choose without needing any agreements from the original owner of the pension.

It might be the only option available if there simply isn't enough value in the other matrimonial assets to allow for offsetting. Once again, considering the example of the large defined benefit transfer of say, £800,000, where the house is worth £400,000, even with an offset where one person gets the house, it may still be necessary to consider a pension share to ensure both parties get a fair share of the overall asset. So that's a combination of sharing and offsetting.

On the other hand, pension sharing outside of Scotland requires a court order, and with that is likely to have additional legal fees. And this is probably one of the reasons that we only see around 11% of divorces involving pension sharing, even though it's a requirement to consider pension assets in the divorce settlement.

So when pension sharing is undertaken, the person receiving the share of the pension is receiving what's known as a pension credit and the person giving up some of their pension receives or gets their pension reduced by a pension debit. In cases, where it's higher value, this kind of implications around the remaining lump sum allowance and lump sum and death benefit labs, particularly where benefits have already been taken or where there are some transitional protection elements in place. You know, we don't have time to go into all of those intricacies today, but all of that is on our technical central website if that is relevant to a particular client of yours.

So, let's consider what kinds of pension can be shared and which ones can't. The first point here is that if you're dealing with solicitors, they might not be aware of the many different pension types, and therefore your help here can be essential.

You can see on the screen a list of pensions, which can be shared on the left and ones which can't on the right, and we'll pull out a few kind of key points. First one is retirement annuity contracts or RACs sometimes as they’re known. It's important to understand that guaranteed annuity rates normally available through retirement, annuities would be lost on transfer and can't be replaced in the context of a divorce. The member should, therefore, carefully consider other options before giving up this potential valuable benefit. And remember, the guaranteed annuity rate would not apply to the pension credit. In other words, that ex-spouse isn't going to receive the benefit, so it would be lost to both partners potentially.

If a pension holds a liquid asset, for example, a commercial property, it can often be difficult to value. For example, a SIPP may own the commercial premises from which the pension holder conducts his or her business making a sharing order, therefore, really difficult to value and implement. And this is where you can help with specialist financial advice in these types of circumstances. When it comes to an annuity, they can still be shared and an annuity would effectively be unwounded and a pension credit be created for the ex-spouse, and that would be called a disqualifying pension credit. We'll talk more about that in a second.

Many people these days will have a combination of defined benefit and defined contribution. Perhaps, their employer closed the DB scheme, and they've now got a combination of that plus a workplace or GPP or perhaps they had some additional AVCs or additional voluntary contributions alongside their DB scheme too.

What you may find is that some clients want to retain the defined benefits if that’s secured and valuable and use the defined contribution part for the pension share. You know, that's fine. You may find some clients have a different approach and it's the complete flip of that and value the flexibility of the DC more than the defined benefit. Regardless, and again, this is where solicitors might not even consider this or investigate if a partial transfer is available from the DB scheme. And I know it's not always available, but if it is, it should be explored and provided as an alternative option for, the divorcing couple.

Moving on to look at those which can't be shared on the right-hand side, the basic state pension and new state pension can't be shared. Although this doesn't mean the value of them shouldn't be considered as it should be. Please bear mind, the old state pension was made up of two parts, the basic state pension, which can't be shared, and the additional state pension, which can be shared. The additional state pension was a top up based on your national insurance contributions and your earnings. The most common in this category would've been SERPs or S2P or State Second Pension. And that could be worth up to a £100,000 and potentially shared, so definitely not ignored. Any death benefits the individual has, such as a dependences pension or a beneficiary drawdown can't be shared, nor can the pensions nor from any pensions already subject to earmarking or a pension sharing order.

So at Royal London, we receive lots of questions about pensions and divorce, and I thought this was an excellent opportunity to share some of these with you. So, we're just going to go through some of these questions just now. So, the first one is what is a disqualifying pension credit? We have mentioned it already, but this is up there with the most frequently asked question.

When a sharing order applies to benefits which are already in payment. For example, a scheme pension, a drawdown fund, or annuity, the PCLS, pension commencement lump sum, or tax-free cash has already been taken. So, the resulting pension credit is called a disqualifying pension credit. So, what this means, as far as the recipient of the credit is concerned, it's classed as uncrystallised, so not accessed yet, or not in payment, but has no entitlement to tax-free cash. So if you're advising the recipient of a disqualifying pension credit. You might be limited to where this can be placed as not all providers will accept them, and just because the credit comes from benefits and payment doesn't mean the recipient can take those benefits themselves. They will only be able to access them when they reach 55, soon to be 57. Remember, without any tax-free cash or PCLS option, obviously.

The next question does the adviser need to transfer permissions when giving advice on a transfer from a DB scheme, defined benefit scheme? The adviser does not need to transfer permission if the only option is to transfer out this is because the ex-spouse is not giving up anything in that seeding or transferring scheme. And the same is true if there's no option but to remain in the scheme. However, if there is an option to remain in the scheme or transfer out, then the adviser would need the transfer permissions to advise on that type of transfer.

The next one is the pension accrued prior to the marriage included, and the answer is it can be particularly in what's known as needs-based cases. Where restricting the pension value to only that accrued during the marriage would not result in a fair outcome. In Scotland, though only the amount relating to what was accrued during the marriage up to the date of separation would be included. Couples can, of course, choose themselves to share the whole pension or have the whole fund included in an offsetting arrangement.

The next question, when is a PODE, remember a pension on divorce expert, required? And as we mentioned earlier this could be appointed for one or both sides in divorce situation. There are a number of situations where the services of a PODE would be recommended, and we'll discuss a few of them.

If one of the parties has benefits built up in a uniformed public sector scheme, such as the armed forces or police, the input of a pensions expert is recommended. Or in general, if there is DB benefits or a combination of benefits, a pension expert's experience could be necessary. And this is because often the value of defined benefits are underappreciated or undervalued.

Although the lifetime allowance has been abolished, the funds are being shared, which are in excess of the lifetime allowance. A pensions expert may be recommended as the lingering effects of the lifetime allowance could mean that an impact on the lump sum allowance and lump sum and death benefit allowance. If there are any guaranteed benefits, for example, guaranteed annuity rates or older plans, which include things like with profits and market value adjustments, a pensions expert would be useful. If there is a serious medical condition, again, a PODE could assist with the enhanced options that are available if the adviser hasn't got experience of this. If the pension investments include a liquid asset such as commercial property, a PODEs assistance again would be useful. This is because, as we said, they can be tricky to value or share. And if there are options regarding which pension should be shared a PODEs advice would be useful to establish the best outcome for all.

The next one is, can you share a pension if you're not married? That's quite simple, no. A pension sharing order is only an option when a couple is getting divorced or dissolving a civil partnership.

The next one, some more questions. Does a pension credit use up annual allowance? Again, no. When the ex-spouse receives a pension credit, this does not count towards their annual allowance. I think of it in this respect, like a transfer value.

When can the recipient of a pension credit access it? We've talked about this a little bit. The pension credit will become the recipient's pension, so they will be able to access it at any time from age 55, soon to be age 57. That's just the standard pension rules. Any tax-free cash taken, we'll use up their lump sum allowance. Although remember the special treatment for a disqualifying pension credit. So in this respect, it gives you that clean break. Just remember that potential tax-free cash issue.

Is the taxation taken into account? The point we're making here, for example, is £200,000 worth of house equity worth the same as a £200,000 pension. That would obviously be taxed when it's taken, whereas the house wouldn't be. The starting point when valuing different assets is that there is no taxation to be taken into account. But when arriving at a fair distribution, a pensions on divorce expert might allow for an adjustment due to taxation. This is in recognition of the spouse who is receiving the non-pension capital will potentially have that tax advantage. And that can result in an adjustment of anything between 15% and 30%, and it's going to depend on the taxation status of the recipient and whether tax-free cash is available from the pension.

The next one is, do you need a lawyer to share a pension? In England and Wales, pension sharing can only take place by a court order. In Scotland, pension sharing can be activated by a court order, or settlements can be reached by negotiations between opposing solicitors and that will be contained in the qualifying agreement rather than a court order. But it’s, you know in theory you don't need to use a lawyer, but it is recommended to get the advice of a lawyer to help with the court order or qualifying agreement process.

Can you share a non-UK pension? And it's not possible to have a UK pension sharing order apply to a non-UK pension. An option might be to transfer the pension to the UK first, but this would require advice and investigation and may or may not be possible. And it's also not possible to apply a non-UK sharing order, the equivalent of a divorce court order somewhere else in the world to a UK based pension.

So, if I was looking at only one point to make to you during the session, it would be, remember, “lawyers are not regulated, qualified, or insured to give financial advice”. There are many instances in divorce proceedings involving pensions, which do require advice and if lawyers can't give it to someone else has to, and you the financial adviser are the best placed to do so. This quote is from that guide we had on the screen earlier that you'll have in the follow-up email.

Now, the positive impact an adviser can have in the divorce process doesn't begin an end with regulated advice. There's a number of other skills advisers possess and utilise in non-divorce work, which can add a lot of value and will often include the skills a lawyer may not possess. For example, when you're looking at establishing the income needs, both current and future for one or both the member and the spouse, it's very important, particularly in needs-based cases to determine income needs, which may impact the split of assets in the divorce process.

Identifying client vulnerability that Shelley touched on and perhaps implementing a strategy to deal with vulnerable clients is vital as we know from those FCA rules. Obviously, the financial services industry has focused a lot of attention on dealing with vulnerable clients in recent years, and it's quite easy to see how divorce could create that vulnerability as it's a life event. Hopefully, most will not have experienced and creates major financial and emotional upheaval. Advisers may be better at identifying this vulnerability and suggesting amended process to take account of it.

Something your client is unlikely to consider or may not even be aware of is the impact separation, divorce and remarriage may have on their death benefits. So making sure expression of wish forms are kept up to date and reflect the up to date wishes is vital. Always consider an independent valuation for armed forces or public sector schemes. And you know, I think we'd go further than this and include any private sector defined benefit schemes too. The reason we're highlighting this is the valuation produced by a scheme actuary can often be quite conservative as they have to be conscious of the existing pension scheme members and the impact that withdrawal would have.

Remember, it's often useful to get independent valuation as you may see quite a difference in the valuation that the scheme provides. Financial advisers could play a vital role here in identifying when that pension's expertise is required.

We mentioned this earlier, but you may need to review any pension attachment orders, keeping in mind pension freedoms, and there's the obvious task of selecting suitable destination plans and pension sharing cases. The ex-spouse is going to look for a home for that potential pension share.

And a further point that's worth raising just because it's so topical at the moment with pensions coming into the scope of Inheritance Tax from April 2027, is that there could potentially be considerations here too, depending on who the beneficiaries are. In some ways it possibly makes it easier than it currently is, where a house would be subject to Inheritance Tax, but a pension isn't, especially if the beneficiaries of the divorcing party estates and death wouldn't be the same people. If they are the same people, it probably doesn't make too much difference.

What might make more of a difference though, is if one party gets the house in the offset deal and the other person doesn't buy a new house. In this case, the person losing the house and an offset arrangement will no longer have the residence, nil rate band, and therefore loses £175,000 of Inheritance Tax nil rate band. They would potentially, or their beneficiaries would potentially, benefit from. It doesn't really impact the divorcing couple, but it will unpack their beneficiaries, who in many instances will be the children, potentially the same people, and could give rise as Shelley said, to additional protection needs. Do remember that in instances where a house is a large part of the matrimonial property, equity release could be an option where capital needs to be raised, but conventional mortgages aren't an option. And if one party wants to remain in the property.

And then there's that final point, which is massive divorce, particularly if you be married for a considerable amount of time, is life altering. Even the likes of which, you know, people will never have experienced and hopefully will only once. As well as the impact it's got on their personal life, their financial circumstances are turned completely on their head, and financial plans and goals may need to be significantly altered or, you know, disappear altogether. Even people who have never taken financial advice may feel the need to do so at the point of divorce. And having a financial adviser involved in the divorce process offering this service at the point the customer needs it without having to, you know, search the unfamiliar market to provide it may be invaluable to their financial circumstances going forward.

Now that's all I was going to say about pensions and divorce. I hope you found it useful and here are the learning outcomes. And if you've asked any questions through the system, Shelley and I will get back to you as soon as possible.

Here are the legals as well as our website for more information. And as Shelley said, please look out for our next webinar in May when we will be discussing the massively important topic of economic abuse. Thank you so much for your time today.