APPENDIX 14
Letter to Committee Assistant from the
National Association of Pension Funds (PS 43)
When they appeared before the Committee on 8
July, the NAPF witnesses promised to provide the Committee with
supplementary notes on three matters relating to pension sharing:
(1) An estimate of the possible cost of rebuilding
pension benefits
(2) An estimate of set-up costs for schemes
(3) A note on "divorces of convenience"
as a result of ill health.
Notes on items 1 and 3 are enclosed.
I would like to stress the estimated nature
of our calculation for item 1—additional tax reliefs if
divorced scheme members were allowed to rebuild their pensions
following a pension share. The Government Actuary and the Treasury
would, no doubt, be able to provide a more accurate figure. With
this caveat, however, we believe our estimate of £4 million
per annum (less future tax paid on the pension and less a reduction
in means-tested benefits) is of the right magnitude and demonstrates
that this change to the draft pension sharing proposals would
not be an expensive one for Government and would greatly reduce
the complexity for divorced members and schemes.
I have not enclosed a note on item 2. We have
calculated set-up costs on a number of bases, each of which produced
differing figures. We do not feel, therefore, that our estimates
would be of assistance to the Committee.
Do not hesitate to contact me if you have any
questions on the contents of this letter or the enclosures.
Rhoslyn N Roberts
Director of Benefits
| Estimate of the tax deferred if members are allowed to rebuild benefits following a pension share
| |
| |
| Number of divorces involving non-state pension benefits
| 50,000 |
| Number of scheme members rebuilding their benefits following a pension share
| 25,000 |
| Approximate value of tax reliefs for occupational and personal pensions
| £9 billion |
| Number of people in occupational schemes = 10 million)
| 15 million |
| Number of people with personal pensions = 5 million)
| |
| Value of tax relief per person per annum: £9 billion/15 million
| £600 |
Assume member `loses' 50 per cent of pension on divorce and rebuilds 25 per cent.
Extra tax relief per person per annum
| £150 |
| |
| Total extra tax relief as a result of rebuilding, per annum*
| £4 million1 |
| |
1. This would be partly off-set once the pension was in payment by the tax paid on the additional pension earned as result of re-building. The higher pension for the member, and subsequently for his/her spouse, would also lead to a reduction in State means-tested benefits.
2. All the figures used above have been rounded and represent very broad estimates.
1 Extract from further letter: For the avoidance of any doubt I should point out that the estimate of £4 million a year is in respect of divorces that take place in that year. The cost would increase year on year until divorced couples reached retirement and began paying tax on the additional pension they had built up. It would then remain broadly constant, provided, of course, that there were no changes to the relevant tax provisions, as the tax relief for newly divorced couples would be off-set by the extra tax paid by retiring divorcees on their additional pensions.
| |
"DIVORCES OF
CONVENIENCE"
Pensions are not heritable. The death of the pensioner often
means that no further payments are due to any dependants and no
capital reverts to the Estate. (There is, normally, a "guarantee
period" following retirement of, typically, five years. This
provides some return for the pensioner on the capital with which
the pension has been secured.) In addition, a pension of, typically,
50 per cent of the member's pension might be payable to a surviving
spouse or dependent.
Pension schemes are funded, and annuity rates calculated,
using assumptions about the longevity of pensioners and their
dependants. If these assumptions are not borne out in practice,
the scheme's funding position will be affected and, potentially,
the security of the other members of the scheme.
NAPF has some concern that "high net worth" individuals
with large pensions who discover that their life expectancy is
impaired could potentially use the pension sharing arrangements
to obtain a financial advantage for their spouses.
This could be achieved if the couple agreed to divorce and
to divide the assets so that all or a substantial proportion of
the pension was allocated to the spouse. The spouse would then
have a continuing entitlement to a substantially larger pension
than that to which she/he would otherwise have been entitled on
the death of the scheme member. This could have a significant
impact on the funding position of a small scheme, particularly
if the pension involved was substantial—as is likely to
be the case.
NAPF recognises that action of this nature will be rare and
would only be of significant benefit to, and a realistic option
for, wealthy individuals with large pensions. The costs of divorce,
together with the new divorce procedures which require a minimum
period of nine months for reflection, make "divorces of convenience"
unlikely. It is our view, nevertheless, that trustees should have
the power to ask for evidence of good health if they wish, before
they provide a CETV quote for pensions in payment. If the evidence
indicates that the member's life expectancy is impaired, the actuary
should be permitted to take this into account when calculating
the CETV.
11 September 1998
|
