Guest post: Impaired life annuities and pension sharing in divorce

Impaired life annuities and pension sharing in divorce
BY Stephens Scown LLP’s family solicitors in Exeter, Truro and St Austell -  who are ranked as the best in Devon and Cornwall by independent legal guides Chambers and Legal 500, look at impaired life annuities and pension sharing in divorce.

For most people divorce is bad enough without the added complications of ill health. If however both these events coincide it is vital for detailed legal and financial advice to be taken in relation to pensions.

In divorce settlements the basic approach that pensions acquired during the marriage are likely to be equally divisible by pension sharing between the couple – i.e. the general objective will be to share the pension income equally between the couple. What if, however, one of the couple has a long term serious medical condition such as type 1 Diabetes? In that situation, subject to medical evidence, that person would be likely to be able to purchase a higher pension/annuity for the same cash, than their healthy spouse. This is often called an “impaired life annuity”, or an “enhanced annuity”.

If the legal advisers are not alive to this issue within a divorce the healthy spouse could find themselves considerably worse off in income terms than their spouse with a health issue if the pension fund value itself is divided equally.

Impaired life annuities within divorce settlements can present a partial solution to the common problem of there being not enough pension to go round by maximising the pension income for the less healthy spouse whilst allowing an increased fund for the healthy spouse.

Pension sharing is a complex area in which the best quality advice must be sought. We work closely with pension actuaries and IFAs to ensure that the best possible solutions are fully explored for our clients.

Liz Allen is a partner and divorce solicitor in Exeter, specialising in financial and business divorce settlements.  She is regularly identified as a leader in her area of law by independent guides to the legal profession, the Legal 500 and Chambers and Partners, as well as being named on the 2010 Citywealth Leaders List, an international guide to the most highly regarded figures in private wealth management.

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6 thoughts on “Guest post: Impaired life annuities and pension sharing in divorce

  1. In my experience, this issue is prevalent in many divorce situations. Sometimes, the illnesses do not qualify for an enhancement and to be honest are brought on by the stress of the divorce itself but others do qualify and should be factored into the settlements.

    I have had situations where the impaired / enhanced rate has increased the starting income by 60% and we have improved the spouse’s share by 20% plus. As stated above the knock on effect of not factoring this in to how the pensions are shared can leave the healthy spouse with much less.

    Example questions to ask your clients are:

    - Do you take medication?
    - Have you ever been hospitalised?
    - Do you smoke?
    - Do you drink?

    Even past occupations and postcode can enhance an annuity so it is worth having the conversation.

    To test whether an enhanced annuity applies it is a relatively simple matter of sending in a common quotation form (http://www.commonquotation.co.uk/) to the enhanced providers. A decent IFA should be able to do this (and will be cognisant of the process as it should form a part of their retirement planning advice process.

    There is even an ambulance chaser operating in the retirement market checking past advice – http://www.missoldannuity.co.uk/

    So it is definitely worth checking the status of both clients before agreeing to a pension share.

  2. An excellent article from Liz on an important subject, with pertinent comments by Phil.

    I would just like to point out that ill health can also be important in cases where pension sharing is by an internal credit. If the current pension owner is in poor health it can be very beneficial to transfer value to the person in average health. Conversely, if the pension credit member is in poor health, as most schemes do not take health into account, a pension sharing order can inadvertently damage the total financial wealth if the pension owner is in good health and the pension credit member is in ill-health.

  3. I don’t believe that pension sharing is ALWAYS more important. As you say, sharing could be more important in some situations, surely it is a financial planning issue. Information is key; if the parties don’t know the extent of the theoretical loss on sharing, they and their advisers cannot make informed decisions. Not all experts compare the pre and post sharing values, so clients and advisers are potentially sleep walking into unexpected losses.

  4. Interesting article, we just wrote about the increasing numbers of over 50′s who are getting divorced. I imagine many of them do not get the correct advice and as a result miss out financially?

  5. Pension sharing is a really tricky area but utilising impaired life annuities is one way round it, although remember these are only available to those who have the most serious of medical illnesses. Most will not be eligible.

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