As a family lawyer, it’s essential to understand the differences between defined benefit (DB) and defined contribution (DC) pensions, especially regarding retirement planning.
Defined Benefit Pensions: The “Golden Ticket” of Retirement
Defined benefit (DB) pensions are often considered the crème de la crème of retirement plans. They’re like a promise from your employer to provide you with a guaranteed income for life after you retire. The Civil Service and Armed Forces pensions are prime examples of DB schemes. These pensions are particularly valuable because they’re “unfunded” public sector schemes, meaning they’re backed by the government.
One key consideration in divorce is the valuation of these pensions. The Cash Equivalent Transfer Value (CETV), which measures what the fund is worth at a particular time, may not fully capture the true worth of a DB pension, making expert valuation essential in divorce.
Defined Contribution Pensions
In contrast, defined contribution pensions operate more like savings pots. The final value of a DC pension depends on contributions made by both the employee and employer, as well as investment performance. They’re the most common type of workplace pension nowadays. When you retire, the amount you receive depends on how much you’ve saved and how well your investments have performed. It’s a bit like a piggy bank that you hope will grow big enough to support you in retirement.
Valuing DC pensions is generally more straightforward, based on the current fund value. One advantage of DC pensions in divorce is their flexibility. They can be shared more easily, with options for external transfers available. However, potential tax implications related to lifetime allowance and annual allowance should be taken into account.
In Summary
Pensions are typically significant matrimonial assets, and proper consideration of both DB and DC pensions is essential for achieving a fair financial settlement in divorce cases. Understanding these nuances can help ensure that both parties are treated equitably during this challenging time.
