Rising gilt yields mean smaller pensions for divorcees

Rising gilt yields mean couples getting divorced are seeing their pension values nearly halved compared to the time at which divorce negotiations concluded.

When couples get divorced, they go through a financial assessment and it is quite common for a spouse, normally the wife, to be entitled to a share of the husband's pension. 

However, a side effect of increasing gilt yields is a massive drop in cash equivalent transfer valuations of defined benefit pension schemes or final salary pensions. 

These types of pension schemes don't have a fund value so, in the event of a divorce, actuaries have the difficult task of working out the equivalent value that is based on what it would cost someone to replace the income promised by the scheme if they were to buy an annuity on the open market. 

Clients who agreed to their divorce settlement several months ago may now be getting transfer paperwork as the legal process will have concluded.

Those who are entitled to a percentage of the spouse's pension will be seeing a much reduced, and unexpected change, in the value they will be able to transfer to their own personal arrangement.

In some cases, divorcees are seeing values nearly 50% lower compared to the original estimates. 

The pension scheme member is in no worse position because they are keeping their pension where it is, in a defined benefit environment. The remaining amount of income they are entitled to from the scheme, when they retire, will be the same as what was agreed in the divorce.

However, the spouse having to accept the transfer is getting a cash equivalent value to set up a personal pension, and these values are greatly reduced from record highs when interest rates were near zero. 

Although there is no easy solution to this, as financial assumptions today mean you need a smaller fund value to purchase the same amount of income through an annuity, some divorcing spouses would prefer a drawdown pension. They are the ones who are the most affected and, in some cases, are hoping to reopen the negotiated settlement.

Samuel Mather-Holgate of Swindon-based advisory firm, Mather & Murray Financial, commented: 

“Many couples getting divorced are seeing their pension values nearly halved compared to when the formal divorce negotiations concluded. This will have massive implications for retirement planning and is seen by many, quite rightly, as grossly unfair. People who are entitled to a percentage of their spouse's pension will be seeing a much reduced, and wholly unexpected change, in the value they will be able to transfer to their own personal arrangement. The ramifications of this for their retirement can be considerable.”