APPENDIX 15
Letter to Clerk of the Committee from
the Association of British Insurers (PS 40)
Our representatives discussed, when giving evidence
on 8 July, the three main parts of the process that may involve
cost to the divorcing parties, and undertook to provide further
information. This was:
(1) Provision of information.
(3) Ongoing charges on a new contract.
Taking each of these in turn:
The expectation of a sample of offices consulted
has suggested that in the vast majority of cases there would be
no explicit charge. There may be some charges on a time spent
basis for a small number of specialised cases or for multiple
requests, but these would not be expected to be significant in
number.
(2) Advice (from an independent financial
adviser):
We explained that this could be paid for
in one of two ways:
(i) Fees—we have asked a sample
of IFAs and they have suggested a fee of around £120-£150
per hour, perhaps with the first half hour free.
(ii) Commission—this is at a standard
rate of 4-5.6 per cent of the transfer amount, which will result
in a reduction of yield of around 0.1-0.2 per cent p.a., on the
funds subsequently invested.
We have sought the reductions in yield for
a sample of Personal Pension Transfer only contracts for a couple
of scenarios from a range of offices. We considered a 35 year
old woman receiving a transfer amount from the divorce settlement
of £10,000, and a 50 year old with a sum of £40,000.
Assuming a retirement age of 60, the ongoing charges, which may
be made in a number of different ways depending on the contract
in question, result in reductions in yield from around 0.6 per
cent to 1.1 per cent p.a. This means that, if we assume underlying
assets grow at nine per cent p.a., the spouses' funds would grow
at 7.9-8.4 per cent. As discussed above, payment of commission
would add about 0.1-0.2 per cent to this.
The total cost of administering the member's
records, administering the assets, and the investment expertise
of the office is on average 0.8 per cent p.a. of the fund. The
range available is a feature of the different terms and target
markets of different offices, and demonstrates the need for quality
independent advice for a spouse at the time of divorce.
We also undertook to provide some data on
an entirely separate issue, which was to compare past rates of
increase in the values of houses and pensions. I enclose figures
compiled by Micropal[17]
which illustrate annualised growth rates over periods of 10 and
15 years between indices covering real estate and pension funds
containing an international spread of equity, bond and other investments.
The figures show the historic trend for pension funds to outperform
property values.
Probably the most relevant comparators shown
on these schedules are those which show the rates of growth experienced
in:
(i) Domestic Property prices (The Halifax
UK Price Index), which showed growth (to 1 July 1998) of:
2.47 per cent pa over 10 years;
5.85 per cent pa over 15 years; and
(ii) A typical "managed fund"
in which many personal pension plans have been invested (The "Mpal
IP Managed GRS"), which showed growth of:
11.77 per cent pa over 10 years;
13.56 per cent pa over 15 years;
so the difference in growth over both time
periods has been circa 8 per cent pa. If this was repeated going
forward (highly conjectural though this is), the divorcing party
that took his or her share in the form of a pension rather than
a house, would have, after 10 years, a pension fund worth twice
as much as the house.
If the 8 per cent pa gap continued over
longer time periods, the difference increases sharply because
of the compounding effect. To illustrate this, we set out below
the relative growth values if house prices rise at 2½ per
cent pa (broadly the rate experienced over the last 10 years)
and pension fund investments grow at 8 per cent pa more (10½
per cent pa). The figures assume that the sharing arrangement
results, at the time of divorce, in one party getting a house
valued at £50,000 and the other a pension fund worth the
same amount:
| | |
|
Period between date
of divorce and date
of retirement
| Value of house
assuming 2½ per
cent pa growth
| Value of pension
fund assuming
10½ per cent growth
| Value of pension
fund versus value
of house
|
| £ | £
| Per cent |
| | |
|
| At date of divorce | 50,000
| 50,000 | Equal |
| 5 years | 56,570 | 82,370
| +45 |
| 10 years | 64,005 | 135,695
| +112 |
| 15 years | 72,415 | 223,550
| +209 |
| 20 years | 81,935 | 368,275
| +349 |
| 25 years | 92,700 | 606,700
| +554 |
| 30 years | 104,900 | 999,450
| +853 |
| | |
|
| | |
|
Of course, future experience in the growth of both property
prices and investment returns could be totally different. It is
also important to note that the party who receives the house has
the use of that house, which has considerable value (probably
roughly equal to the rent that could be obtained if the house
was let) not reflected in the comparisons above. But the concept
of "notional rent" is not one everybody understands
easily. We believe it is important that the kind of differences
in capital values which may arise over time should be understood
at the point of divorce. This underpins our belief that sound
financial advice is critical and valuable at the point of divorce.
If we can help further please contact me.
R H Hobbs
Head of Life Insurance
4 September 1998
17
Not printed. Back
|
